10-Q 1 0001.txt VERITAS DGC INC. - DATED APRIL 30, 2000 1 =============================================================================== UNITED STATES 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 APRIL 30, 2000 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 1-7427 VERITAS DGC INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0343152 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3701 KIRBY DRIVE, SUITE #112 HOUSTON, TEXAS 77098 (Address of principal executive offices) (Zip Code)
(713) 512-8300 (Registrant's telephone number, including area code) NO CHANGES (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the Company's common stock (the "Common Stock"), $.01 par value, outstanding at May 31, 2000 was 26,763,912 (including 2,019,134 Veritas Energy Services Inc. exchangeable which are identical to the Common Stock in all material respects). =============================================================================== 2 VERITAS DGC INC. AND SUBSIDIARIES FORM 10-Q INDEX ================================================================================
Page Number ----------- PART I. Financial Information Item 1. Financial Statements Consolidated Statements of Income and Comprehensive Income - For the Three and Nine Months Ended April 30, 2000 and 1999 1 Consolidated Balance Sheets - April 30, 2000 and July 31, 1999 2 Consolidated Statements of Cash Flows - For the Nine Months Ended April 30, 2000 and 1999 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 12 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signatures 17
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) REVENUES $ 93,742 $ 74,610 $ 253,442 $ 323,061 COSTS AND EXPENSES: Cost of services Operating expenses 62,931 47,416 166,256 217,477 Research and development 2,079 2,214 6,119 5,679 Depreciation and amortization 17,490 17,415 54,328 51,999 Selling, general & administrative 4,569 4,525 12,279 13,582 Interest expense 3,605 3,553 10,595 9,156 Other income (822) (1,496) (1,997) (3,899) ---------- ---------- ---------- ---------- Total costs and expenses 89,852 73,627 247,580 293,994 Income before provision for income taxes and equity in loss of joint venture 3,890 983 5,862 29,067 Provision for income taxes 1,411 292 2,474 9,231 Equity in (earnings) loss of joint venture (60) 186 259 273 ---------- ---------- ---------- ---------- Net income before extraordinary charge 2,539 505 3,129 19,563 Extraordinary loss on debt repurchase (net of tax, $95) 187 ---------- ---------- ---------- ---------- Net income $ 2,539 $ 505 $ 2,942 $ 19,563 Other comprehensive income (loss) (net of tax - $0 in both periods) Foreign currency translation adjustments (1,649) 1,826 588 (1,427) Unrealized gain (loss) on investments-available for sale 356 (837) (923) (837) ---------- ---------- ---------- ---------- Comprehensive income $ 1,246 $ 1,494 $ 2,607 $ 17,299 ========== ========== ========== ========== PER SHARE: BASIC Net income per common share before extraordinary item $ .10 $ .02 $ .12 $ .86 Net loss per common share from extraordinary item ---------- ---------- ---------- ---------- Net income per common share $ .10 $ .02 $ .12 $ .86 ========== ========== ========== ========== Weighted average common shares 26,080 22,756 25,055 22,721 ========== ========== ========== ========== DILUTED Net income per common share before extraordinary item $ .09 $ .02 $ .12 $ .85 Net loss per common share from extraordinary item (.01) ---------- ---------- ---------- ---------- Net income per common share $ .09 $ .02 $ .11 $ .85 ========== ========== ========== ========== Weighted average common shares 26,817 22,982 25,631 22,923 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements 1 4 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
APRIL 30, JULY 31, 2000 1999 ------------ ------------ Unaudited (In thousands) ASSETS Current assets: Cash and cash equivalents $ 35,476 $ 73,447 Restricted cash investments 202 300 Accounts and notes receivable (net of allowance: April $2,248; July $3,038) 108,982 113,761 Materials and supplies inventory 4,964 4,417 Prepayments and other 9,206 8,259 Investments-available for sale 4,119 3,671 ------------ ------------ Total current assets 162,949 203,855 Property and equipment 398,085 357,397 Less accumulated depreciation 253,046 201,026 Plus assets held for sale (see Note 2) 4,938 ------------ ------------ Property and equipment - net 149,977 156,371 Multi-client data library 211,410 138,753 Investment in and advances to joint venture 2,381 2,640 Goodwill (net of accumulated amortization: April $4,510; July $3,683) 10,502 2,159 Deferred tax asset 34,232 23,120 Long term notes receivable (net of allowance: $1,000 in both periods) 4,062 3,696 Other assets 11,175 11,252 ------------ ------------ Total $ 586,688 $ 541,846 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 129 $ 240 Accounts payable - trade 32,142 26,243 Accrued interest 566 4,010 Other accrued liabilities 41,490 48,640 Income taxes payable 2,136 5,472 ------------ ------------ Total current liabilities 76,463 84,605 Non-current liabilities: Long-term debt - less current maturities 135,000 135,011 Other non-current liabilities 10,780 6,672 ------------ ------------ Total non-current liabilities 145,780 141,683 Stockholders' equity: Preferred stock, $.01 par value; authorized: 1,000,000 shares; none issued Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 24,551,735 shares at April and 21,470,938 shares at July (excluding exchangeable shares of 2,033,027 at April and 1,505,595 at July) 245 214 Additional paid-in capital 254,768 208,749 Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 117,594 114,652 Accumulated comprehensive income: Cumulative foreign currency translation adjustment (3,764) (4,352) Unrealized loss on investments-available for sale (1,480) (557) Unearned compensation (1,010) (602) Treasury stock, at cost; 109,785 shares at April and 150,068 shares at July (1,908) (2,546) ------------ ------------ Total stockholders' equity 364,445 315,558 ------------ ------------ Total $ 586,688 $ 541,846 ============ ============
See Notes to Consolidated Financial Statements 2 5 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
NINE MONTHS ENDED APRIL, 30 ------------------------ 2000 1999 ---------- ---------- (In thousands) OPERATING ACTIVITIES: Net income $ 2,942 $ 19,563 Non-cash items included in net income: Depreciation and amortization 54,328 51,999 Net loss on disposition of property and equipment 182 530 Equity in loss of joint venture 259 273 Amortization of multi-client data library 745 1,104 Deferred taxes (9,576) 10,154 Amortization of unearned compensation 513 318 Change in operating assets/liabilities: Accounts and notes receivable 6,761 26,684 Materials and supplies inventory (515) 106 Prepayments and other (1,833) 8,007 Multi-client data library (72,151) (67,955) Accounts payable and other accrued liabilities (9,451) (20,313) Income taxes payable (1,362) (11,737) Other non-current liabilities 4,108 222 Other (800) (1,795) ---------- ---------- Total cash (used in) provided by operating activities (25,850) 17,160 FINANCING ACTIVITIES: Net (payments) borrowings on long-term debt (296) 59,768 Senior notes issue costs (34) (1,882) Net proceeds from sale of common stock 20,063 1,009 Purchase of treasury stock (145) (2,859) ---------- ---------- Total cash provided by financing activities 19,588 56,036 INVESTING ACTIVITIES: Decrease (increase) in restricted cash investments 98 (108) Decrease in investment in and advances to joint venture 1,183 Acquisitions, net of cash received (2,262) (704) Sale of KC Offshore, net 6,935 Purchase of property and equipment (39,505) (34,651) Sale of property and equipment 3,036 284 ---------- ---------- Total cash used by investing activities (31,698) (33,996) Currency loss on foreign cash (11) (1,427) ---------- ---------- Change in cash and cash equivalents (37,971) 37,773 Beginning cash and cash equivalents balance 73,447 40,089 ---------- ---------- Ending cash and cash equivalents balance $ 35,476 $ 77,862 ========== ==========
See Notes to Consolidated Financial Statements 3 6 VERITAS DGC INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
NINE MONTHS ENDED APRIL 30, -------------------------- 2000 1999 ---------- ---------- (In thousands) SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase in property and equipment for accounts payable - trade $ 713 $ 4,560 Utilization of net operating loss carryforwards existing prior to the quasi-reorganization resulting in an increase (decrease) in: Deferred tax asset valuation allowance (212) (1,019) Additional paid-in capital 212 1,019 Treasury stock issued for purchase of Time Seismic Exchange Ltd. 664 Treasury stock issued in lieu of cash for bonuses payable 974 Restricted stock issued for future services resulting in an increase in additional paid-in capital and unearned compensation 783 42 Treasury stock issued for future services resulting in an increase (decrease ) in: Additional paid-in-capital 138 (144) Unearned compensation 921 289 Stock and options issued for purchase of Enertec Resource Services Inc. (net of cash received) 25,189 Settlement of accounts receivable and interest payments from investments-available for sale 1,371 Reclass accounts and notes receivable, net to long term notes receivable, net 3,696 Reclass accounts and notes receivable to investments-available for sale 3,510 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest - Senior notes 13,163 10,026 Equipment purchase obligations 17 30 Other 859 590 Income taxes 9,696 9,994
See Notes to Consolidated Financial Statements 4 7 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION Veritas DGC Inc. ("Veritas DGC") provides seismic data acquisition, data processing, multi-client data sales and exploration and development information services to the petroleum industry in selected markets worldwide. The accompanying consolidated financial statements include the accounts of Veritas DGC and all majority-owned domestic and foreign subsidiaries. Investment in a joint venture is accounted for on the equity method. All material intercompany balances and transactions have been eliminated. All material adjustments consisting only of normal recurring adjustments that, in the opinion of management are necessary for a fair statement of the results for the interim periods, have been reflected. These interim financial statements should be read in conjunction with the annual consolidated financial statements of Veritas DGC. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Veritas DGC will be required to implement this statement in its first quarter of fiscal year 2001. Veritas DGC believes that the implementation of this standard will not have a material effect on its consolidated financial position or results of operations. 2. PURCHASE OF ENERTEC RESOURCE SERVICES INC. On September 30, 1999, Veritas DGC, Veritas Energy Services Inc. ("VESI") and Enertec Resource Services Inc. ("Enertec"), a Canadian company, consummated a business combination (the "Combination") whereby Enertec became a wholly owned subsidiary of VESI. As a result of the Combination, each share of Enertec stock was converted into the right to receive VESI Class A Exchangeable Series 1 stock (the "Exchangeable" shares) at an exchange ratio of 0.345 of a share of the Exchangeable stock for each share of Enertec. All of the holders of Enertec common shares became holders of Exchangeable shares and accordingly, 2,437,527 shares of Exchangeable stock were issued. Each Exchangeable share is convertible, at the option of the shareholder, into one share of Veritas DGC's common stock. Outstanding options to purchase shares of Enertec stock were converted into options to purchase approximately 236,000 shares of Veritas DGC's common stock at the exchange ratio of 0.345 of a Veritas DGC stock option for each Enertec option. The total purchase price of Enertec was approximately $28.0 million, comprised of approximately $24.8 million of stock, $0.9 million of Veritas DGC options and $2.3 million of business combination costs. The acquisition was accounted for as a purchase with the preliminary allocation of purchase price, in accordance with APB 16, yielding approximately $5.9 million of current assets, $13.4 million of property and long-term assets, $2.6 million of liabilities and $11.3 million of goodwill. Goodwill will be amortized over no more than ten years. 5 8 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED Certain seismic acquisition assets obtained through the Enertec transaction are being held for sale. These assets have been assigned an estimated fair market value of $4.9 million based on the current sales prices of equivalent equipment in the marketplace. This amount has been classified on the balance sheet, under property and equipment, as assets held for sale. Veritas DGC anticipates that most of the equipment will be disposed of within one year of its acquisition On April 28, 2000 Veritas DGC sold its marine high resolution survey business, KC Offshore, L.L.C. and its subsidiary Kinco Operating, Inc., to the Racal Corporation for $6.9 million, net after settlement of intercompany accounts. These assets had previously been classified as assets held for sale and valued at $9.0 million. The after tax losses associated with the assets held for sale, including those sold to the Racal Corporation, were excluded from income and accounted for as an adjustment to the carrying value of the assets. The excluded after tax losses for the quarter and nine months ended April 30, 2000 were $315 and $560, respectively. Pro forma revenue, net income before extraordinary item, net income and earnings per share of the combined Veritas DGC/Enertec entity, presented as if the Combination had occurred on August 1, 1999 and 1998, are shown below. This pro forma financial information is not necessarily indicative of the actual results that would have been achieved had the Combination occurred at the beginning of the periods presented.
Three Months Ended Nine Months Ended April 30, April 30, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (In thousands, except per share amounts) Revenue $ 93,742 $ 81,139 $ 258,811 $ 347,232 Net income before extraordinary item $ 2,539 $ (305) $ 3,362 $ 17,932 Net income $ 2,539 $ (305) $ 3,175 $ 17,932 Earnings per share: Basic Net income per common share before extraordinary item 0.10 (0.01) 0.13 0.71 Net income per common share 0.10 (0.01) 0.13 0.71 Diluted Net income per common share before extraordinary item 0.09 (0.01) 0.12 0.71 Net income per common share 0.09 (0.01) 0.12 0.71
3. INVESTMENT IN INDONESIAN JOINT VENTURE Veritas DGC owns 80% of an Indonesian joint venture (now known as P.T. Veritas DGC Mega Pratama). The joint venture is accounted for under the equity method due to provisions in the joint venture agreement that gives minority shareholders the right to exercise control. Summarized financial information is as follows: 6 9 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED
April 30, July 31, 2000 1999 -------- -------- (In thousands) Current assets $ 1,109 $ 1,380 Property and equipment, net 110 314 Multi-client data library 2,854 -------- -------- Total assets $ 4,073 $ 1,694 ======== ======== Current liabilities $ 466 $ 438 Advances from affiliates 15,122 12,479 Stockholders' deficit: Common stock 2,576 2,576 Accumulated deficit (14,091) (13,799) -------- -------- Total stockholders' deficit (11,515) (11,223) -------- -------- Total liabilities and stockholders' deficit $ 4,073 $ 1,694 ======== ========
Three Months Ended Nine Months Ended April 30, April 30, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands) Revenues $ 355 $ 1,123 $ 1,304 $ 1,907 Cost and expenses: Cost of services 267 1,220 1,327 1,834 Depreciation and amortization 83 84 253 254 Other (income) expense (55) 5 (17) 92 -------- -------- -------- -------- Total costs and expenses 295 1,309 1,563 2,180 -------- -------- -------- -------- Net income (loss) $ 60 $ (186) $ (259) $ (273) ======== ======== ======== ========
4. LONG-TERM DEBT Long-term debt is as follows:
April 30, July 31, 2000 1999 ---------- ---------- (In thousands) Senior notes due October 2003, at 9 3/4% $ 135,000 $ 135,000 Equipment purchase obligations maturing through September 2000, at a weighted average rate of 10% 251 Equipment purchase obligations maturing through July 2001, at 8.75% 129 ---------- ---------- Total 135,129 135,251 Less current maturities 129 240 ---------- ---------- Due after one year $ 135,000 $ 135,011 ========== ==========
The senior notes are due in October 2003 with interest payable semi-annually at 9 3/4% per annum. The senior notes are unsecured and are effectively subordinated to secured debt of Veritas DGC with respect to the assets securing such debt and to all debt of its subsidiaries whether secured or unsecured. The indenture relating to the senior notes contains certain covenants that limit Veritas DGC's ability to, among other things, incur additional debt, pay dividends and complete mergers, acquisitions and sales of assets. Upon a change in control of Veritas DGC, as defined in the indenture, the holders of the senior notes have the right to require Veritas DGC to purchase all or a portion of such holder's senior note at a price equal to 101% of the aggregate principal amount. Veritas DGC has the right to redeem the senior notes, in whole or part, on or after October 15, 2000. On September 24, 1999, Veritas DGC repurchased $5.5 million of 9 3/4% senior notes on the open market at a price of $5.7 million, resulting in an 7 10 extraordinary loss of $0.2 million, net of tax. On December 3, 1999, Veritas DGC reissued $1.0 million of 9 3/4% senior notes at a price of $1.0 million. On December 10, 1999, Veritas DGC reissued $4.6 million of 9 3/4% senior notes at a price of $4.7 million. Veritas DGC maintains a revolving credit agreement due July 2001 with commercial lenders that provides advances up to $50.0 million. Advances are limited by a borrowing base, which is in excess of the credit limit at April 30, 2000 and bears interest, at Veritas DGC's election, at LIBOR plus a margin or prime rate based on certain financial ratios maintained by Veritas DGC. Advances are secured by certain accounts receivable. Covenants in the agreement limit, among other things, Veritas DGC's right to take certain actions, including creating indebtedness. In addition, the agreement requires Veritas DGC to maintain certain financial ratios. No advances were outstanding at April 30, 2000 and July 31, 1999 under the credit agreement, although $5.8 million in letters of credit had been issued under the facility. Veritas DGC's equipment purchase obligations represent installment loans and capitalized lease obligations primarily related to computer and seismic equipment. 5. OTHER ACCRUED LIABILITIES Other accrued liabilities include the following:
April 30, July 31, 2000 1999 --------------- -------------- (In thousands) Accrued payroll and benefits $ 8,709 $ 5,518 Deferred revenues $ 13,867 $ 10,717 Accrued taxes other than income $ 4,621 $ 12,086
6. OTHER INCOME Other income consists of the following:
Three Months Ended Nine Months Ended April 30, April 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands) Interest income $ (914) $ (1,267) $ (2,457) $ (2,721) Net loss on disposition of property and equipment 74 211 182 530 Net foreign currency exchange losses (gains) 18 (420) 256 (1,549) Other (20) 22 (159) -------- -------- -------- -------- Total $ (822) $ (1,496) $ (1,997) $ (3,899) ======== ======== ======== ========
8 11 7. EARNINGS PER COMMON SHARE Earnings (losses) per common share - basic and diluted are computed as follows:
Three Months Ended Nine Months Ended April 30, April 30, ---------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (In thousands, except per per share amounts) Net income before extraordinary item $ 2,539 $ 505 $ 3,129 $ 19,563 Extraordinary loss on debt repurchase 187 -------- -------- -------- -------- Net income $ 2,539 $ 505 $ 2,942 $ 19,563 ======== ======== ======== ======== Weighted average common shares 26,080 22,756 25,055 22,721 Basic Net income per common share before extraordinary item $ .10 $ .02 $ .12 $ .86 Net loss per common share from extraordinary item -------- -------- -------- -------- Net income per common share $ .10 $ .02 $ .12 $ .86 ======== ======== ======== ======== Weighted average common shares - assuming dilution: Weighted average common shares 26,080 22,756 25,055 22,721 Shares issuable from assumed conversion of: Options 737 226 576 202 Warrants -------- -------- -------- -------- Total 26,817 22,982 25,631 22,923 ======== ======== ======== ======== Diluted Net income per common share before extraordinary item $ .09 $ .02 $ .12 $ .85 Net loss per common share from extraordinary item (.01) -------- -------- -------- -------- Net income per common share $ .09 $ .02 $ .11 $ .85 ======== ======== ======== ========
VESI exchangeable shares, which were issued in business combinations, and may be exchanged for Veritas DGC's common stock and are identical to Veritas DGC's common stock in all material respects, are included in the above computations. The following options to purchase common shares have been excluded from the computation assuming dilution because the options' exercise prices exceeded the average market price of the underlying common shares as of the date the period ended.
Nine Months Three Months Ended Ended April 30, April 30, ---------------------------------------- ------------------------------------------- 2000 1999 2000 1999 ----------------- ------------------ ------------------ ------------------ Number of options 725,314 837,966 1,372,340 812,131 Exercise price range $19 3/8 - $55 1/8 $12 5/16 - $56 1/2 $17 1/16 - $55 1/8 $16 5/16 - $56 1/2 Expiring through March 2010 March 2009 March 2010 November 2008
9 12 8. UNREALIZED LOSS ON INVESTMENTS-AVAILABLE FOR SALE In April 1999, Veritas DGC exchanged a $4.7 million account receivable from Miller Exploration Company ("Miller"), a publicly traded company, for a long term note receivable paying 18% interest. Interest is paid in common stock warrants, with an exercise price of $0.01 per share, in advance, at six month intervals. The common stock underlying these warrants has been registered with the SEC. In addition, Veritas DGC exchanged a $4.1 million account receivable from Brigham Exploration Company ("Brigham"), a publicly traded company, for 1,211,580 shares of Brigham common stock. The cost basis of the investments available for sale is determined by the fair market value on the date received.
April 30, 2000 July 31, 1999 ------------------------------------- ------------------------------------- Unrealized Unrealized Cost Basis (Loss) Fair Value Cost Basis (Loss)/Gain Fair Value ---------- ---------- ---------- ---------- ----------- ----------- (In thousands) Brigham common stock $ 4,099 $(1,070) $ 3,029 $ 3,809 $(1,143) $ 2,666 Miller Warrants 1,500 (410) 1,090 419 586 1,005 ------- ------- ------- ------- ------- ------- $ 5,599 $(1,480) $ 4,119 $ 4,228 $ (557) $ 3,671 ======= ======= ======= ======= ======= =======
9. INCOME TAXES The increase in the effective tax rate results from unbenefitted losses in certain countries and the inability to use foreign tax credits in the current year. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. Veritas DGC's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors which are more fully described in other reports filed with the Securities and Exchange Commission and which include changes in market conditions in the oil and gas industry as well as declines in prices of oil and gas. RESULTS OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2000 COMPARED WITH THREE MONTHS ENDED APRIL 30, 1999 Revenues. Revenues increased 26%, from $74.6 million to $93.7 million. Multi-client revenue increased 37%, from $33.8 million to $46.4 million. This is a reflection of Veritas DGC's expansion of its multi-client business in the Gulf of Mexico and Brazil. Contract revenue increased 16%, from $40.8 million to $47.3 million, driven by an increase in the utilization of land acquisition crews from seven to nine. Cost of services. Cost of services increased 31%, from $49.6 million to $65.0 million. However, cost of services as a percent of revenues increased from 67% to 69%. Depreciation and amortization. Depreciation and amortization expense remained relatively the same. An increase in depreciation as a result of the Enertec acquisition and capital spending is offset by a decrease due to fully depreciated assets in Oman. Gross property and equipment, excluding assets held for sale, increased by $43.6 million, or 13% between the comparative income statement period ending dates. Selling, general and administrative. Selling, general and administrative expense remained relatively the same. Interest expense. Interest expense remained essentially flat, with long term debt being the same in both quarters. Other income. Other income decreased from $1.5 million to $0.8 million. Interest income in the current period was $.9 million, versus $1.3 million last year, due to a decrease in cash between the comparative period ending dates. A currency gain of $.4 million in the prior year contributed to the remaining difference. Income taxes. Income taxes increased from a provision of $0.3 million to $1.4 million as a result of Veritas DGC's higher earnings in the current quarter. The increase in the effective tax rate from 30% to 36% is due to unbenefitted losses in certain countries and the inability to use foreign tax credits in the current year. Equity in (earnings) loss of joint venture. Equity in (earnings) loss of joint venture is related to the Indonesian joint venture. An increase in marine contract work in Jakarta accounts for the increased profitability in the current quarter. NINE MONTHS ENDED APRIL 30, 2000 COMPARED WITH NINE MONTHS ENDED APRIL 30, 1999 Revenues. Revenues decreased 22%, from $323.1 million to $253.4 million. Multi-client revenue decreased 1%, from $129.3 million to $128.6 million, while contract revenue decreased 36%, from $193.8 million to $124.8 million. The overall decrease is due to the continuing downturn in exploration spending, but the relatively flat multi-client numbers reflects Veritas DGC's increased investment in its multi-client data base as well as an increasing industry trend to acquire seismic data by licensing it on a multi-client basis. Cost of services. Cost of services decreased 23%, from $223.2 million to $172.4 million. However, cost of services as a percent of revenues decreased from 69% to 68%. 11 14 Depreciation and amortization. Depreciation and amortization expense increased by 4%, from $52.0 million to $54.3 million, due to capital spending and the Enertec acquisition. Gross property and equipment, excluding assets held for sale, increased by $43.6 million, or 13%, between the comparative income statement period ending dates. Selling, general and administrative. Selling, general and administrative expense decreased by 10%, from $13.6 million to $12.3 million. The termination of a process improvement project in fiscal year 1999 and lower property tax accruals in the first quarter of fiscal year 2000 were the primary reasons for the reduction. Interest expense. Interest expense increased from $9.2 million to $10.6 million due to the addition of $60.0 million of 9 3/4% senior notes at the end of October 1998. Other income. Other income decreased from $3.9 million to $2.0 million. Most of the difference is due to $0.3 million of additional interest income and $1.5 million of foreign currency exchange gains during the previous fiscal year. Income taxes. Income taxes decreased from a provision of $9.2 million to $2.5 million as a result of Veritas DGC's lower earnings in the current year. The increase in the effective tax rate from 32% to 42% is due to unbenefitted losses in certain countries and the inability to use foreign tax credits in the current year. Equity in (earnings) loss of joint venture. Equity in (earnings) loss of joint venture is related to the Indonesian joint venture. Decrease in marine contract work accounts for the decreased profitability in the current fiscal year. Extraordinary loss on debt repurchase. On September 24, 1999, Veritas DGC repurchased $5.5 million of its 9 3/4% senior notes on the open market at a price of $5.7 million. The excess of purchase price over face value and the write off of the pro rata debt issuance costs associated with the notes are reported as an extraordinary item, net of tax. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK There have been no significant changes that would effect market risk since July 31, 1999. LIQUIDITY AND CAPITAL RESOURCES SOURCES AND USES Veritas DGC's internal sources of liquidity are cash, cash equivalents and cash flow from operations. External sources include public and private financing, the unutilized portion of a revolving credit facility, equipment financing and trade credit. As of April 30, 2000, Veritas DGC had $135.0 million in senior notes outstanding due in October 2003. Veritas DGC also has a revolving credit facility due July 2001 from commercial lenders that provides advances up to $50.0 million. Advances are limited by a borrowing base, which is in excess of the credit limit at April 30, 2000 and bear interest, at Veritas DGC's election, at LIBOR plus a margin or prime rate based on certain financial ratios maintained by Veritas DGC. Advances are secured by certain accounts receivable. As of April 30, 2000, there are no outstanding advances under the credit facility, but $5.8 million of the credit facility has been utilized for letters of credit, leaving $44.2 million available for borrowings. In April 2000, Veritas DGC sold KC Offshore, L.L.C. and its subsidiary Kinco Operating, Inc. for $8.6 million. The net cash received, after settlement of intercompany accounts, was $6.9 million. KC Offshore was an operating unit of Enertec Resource Services Inc., which was acquired by Veritas DGC in September 1999. Veritas DGC requires significant amounts of working capital to support its operations and fund capital spending and research and development programs. Veritas DGC's current capital expenditure forecast for fiscal 2000 is approximately $56.0 million, which includes expenditures of approximately $25.0 million 12 15 to maintain or replace current operating equipment. Research and development expenditures for fiscal 2000 are budgeted at $8.3 million. Veritas DGC has also increased its multi-client activity and significantly expanded its multi-client data library. Because of the elapsed time between survey execution, sale and ultimate cash receipt, multi-client work generally requires greater amounts of working capital than contract work. Depending upon the timing of the sales of the multi-client surveys and the contract terms relating to the collection of the proceeds from such sales, Veritas DGC's liquidity may be affected. Veritas DGC seeks pre-funding commitments from customers for a portion of the cost of these surveys. However, because of market conditions, customer purchase commitment levels are currently much lower than in past years. Veritas DGC believes that these multi-client surveys have good long-term sales, earnings and cash flow potential, but there is no assurance that Veritas DGC will recover the costs of these surveys. In addition to the capital expenditure budget, the planned net investment in the multi-client data library (the change in the balance sheet account) for fiscal 2000 is $81.0 million. Veritas DGC will require substantial cash flow to continue operations on a satisfactory basis, complete its capital expenditure and research and development programs and meet its principal and interest obligations with respect to outstanding indebtedness. While management believes that Veritas DGC has adequate sources of funds to meet its liquidity needs, its ability to meet its obligations depends on its future performance, which, in turn, is subject to general economic conditions, business and other factors beyond Veritas DGC's control. Key factors affecting future results will include utilization levels of acquisition and processing assets and the level of multi-client data library sales, all of which are driven by exploration spending and, ultimately, by underlying commodity prices. If Veritas DGC is unable to generate sufficient cash flow from operations or otherwise to comply with the terms of its revolving credit facility or indentures, it may be required to refinance all or a portion of its existing debt or obtain additional financing. Veritas DGC cannot make any assurances that it would be able to obtain such refinancing or financing, or any refinancing or financing would result in a level of net proceeds required. To ensure that Veritas DGC has available as many financing options as possible, it has filed a shelf registration allowing the issuance of up to $200 million in debt, preferred stock or common stock. On October 26, 1999 Veritas DGC filed a prospectus supplement relating to the sale of up to 2.0 million shares of Veritas DGC common stock, from time to time through ordinary brokerage transactions, under the currently effective shelf registration. As of April 30, 2000, Veritas DGC has issued 0.7 million shares under this prospectus supplement, generating $15.4 million in proceeds. OTHER Since Veritas DGC's quasi-reorganization with respect to Digicon Inc. on July 31, 1991, the tax benefits of net operating loss carryforwards existing at the date of the quasi-reorganization have been recognized through a direct addition to paid-in capital, when realization is more likely than not. Additionally, the utilization of the net operating loss carryforwards existing at the date of the quasi-reorganization is subject to certain limitations. During the nine months ended April 30, 2000, Veritas DGC recognized $0.2 million of these benefits, due to increased profitability of Veritas DGC's U.K. operations. Veritas DGC maintains operations in Europe, which are predominately conducted from its U.K. offices. Although the U.K. has not currently elected to convert to the new "euro" currency, Veritas DGC does have transactions with companies in countries that have adopted the new currency. Veritas DGC has made a preliminary assessment and does not anticipate any material effect to the consolidated financial statements as a result of the new currency. See Note 1 of Notes to Consolidated Financial Statements regarding new accounting pronouncements not yet adopted. 13 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS FILED WITH THIS REPORT: Exhibit ------- 3-A) Restated Certificate of Incorporation with amendments of Digicon Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) By-laws of new Digicon Inc. dated June 24, 1991. (Exhibit 3-C to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-D) Certificate of Amendment to Restated Certificate of Incorporation of Veritas DGC Inc. dated September 30, 1999. (Exhibit 3-D to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1999 is incorporated herein by reference.) 3-F) By-laws of Veritas DGC Inc. as amended and restated March 7, 2000. (Exhibit 3-E to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 2000 is incorporated herein by reference.) 4-A) Specimen certificate for Senior Notes (Series A). (Included as part of Section 2.2 Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-C) Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996 is incorporated herein by reference.) 4-D) Rights Agreement between Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated May 15, 1997. (Exhibit 4.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated May 27, 1997 is incorporated herein by reference.) 4-E) Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-48953 dated March 31, 1998 is incorporated herein by reference.) *4-F) Veritas DGC Inc. Restricted Stock Plan (As amended and restated March 7, 2000.) 4-G) Key Contributor Incentive Plan as Amended and Restated dated March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s Registration Statement No. 333-74305 dated March 12, 1999 is incorporated herein by reference.) 4-H) Specimen for Senior Notes (Series C). (Exhibit 4-K to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 1999 is incorporated herein by reference.) 14 17 4-I) Indentures relating to the 9 3/4% Senior Notes due 2003, Series B and Series C of Veritas DGC Inc. between Veritas DGC Inc. and State Street Bank and Trust Company dated October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s Current Report on Form 8-K dated November 12, 1998 is incorporated herein by reference.) 9-A) Voting and Exchange Trust Agreement dated August 30, 1996 among Digicon Inc., Veritas Energy Services Inc. and the R-M Trust Company dated August 30, 1996. (Exhibit 9.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 9-B) Voting and Exchange Trust Agreement dated September 30, 1999 among Veritas DGC Inc., Veritas Energy Services Inc. and the CIBC Mellon Trust Company. (Exhibit 9-B to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1999 is incorporated herein by reference.) 10-A) Support Agreement between Digicon Inc. and Veritas Energy Services Inc. dated August 30, 1996. (Exhibit 10.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated August 30, 1996 is incorporated herein by reference.) *10-B) 1992 Non-Employee Director Stock Option Plan (As amended and restated March 7, 2000.) *10-C) 1992 Employee Nonqualified Stock Option Plan (As amended and restated March 7, 2000.) 10-D) 1997 Employee Stock Purchase Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-38377 dated October 21, 1997 is incorporated herein by reference.) 10-E) Restricted Stock Agreement between Veritas DGC Inc. and Anthony Tripodo dated April 1, 1997. (Exhibit 10-O to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-F) Employment Agreement executed by David B. Robson. (Exhibit 10-L to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-G) Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-H) Employment Agreement executed by Anthony Tripodo. (Refer to Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-I) Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-J) Employment Agreement executed by Timothy L. Wells. (Exhibit 10-J to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1999 is incorporated herein by reference.) 10-K) Credit Agreement among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and agent for the banks, and the banks therein named dated November 1, 1999. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1999 is incorporated herein by reference.) 15 18 10-L) Sales agency agreement between Veritas DGC Inc. and PaineWebber Incorporated, dated October 26, 1999. (Exhibit 1.1 to Veritas DGC Inc.'s Form 8-K filed on October 26, 1999 is incorporated herein by reference.) *10-M) Form of Indemnity Agreement between Veritas DGC Inc. and its executive officers and directors (as amended and restated March 7, 2000.) 10-N) Employment Agreement executed by Richard C. White. (Exhibit 10-Q to Veritas DGC Inc's Form 10-Q for the quarter ended January 31, 2000 is incorporated herein by reference.) *10-O) Indemnity Agreement between Veritas DGC Inc. and Richard C. White. *27) Financial Data Schedule. * Filed herewith b) REPORTS ON FORM 8-K Veritas DGC did not file a Form 8-K during the quarter ended April 30, 2000. 16 19 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, on the 14th day of June 2000. VERITAS DGC INC. By: /s/ Richard C. White ------------------------------------- RICHARD C. WHITE Chief Executive Officer /s/ Anthony Tripodo ------------------------------------- ANTHONY TRIPODO Executive Vice President, Chief Financial Officer and Treasurer 17 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4-F Veritas DGC Inc. Restricted Stock Plan (As amended and restated March 7, 2000.) 10-B 1992 Non-Employee Director Stock Option Plan (As amended and restated March 7, 2000.) 10-C 1992 Employee Nonqualified Stock Option Plan (As amended and restated March 7, 2000.) 10-M Form of Indemnity Agreement between Veritas DGC Inc. and its executive officers and directors (as amended and restated March 7, 2000.) 10-O Indemnity Agreement between Veritas DGC Inc. and Richard C. White. 27 Financial Data Schedule.