-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hzG1FizyyfaOVA2R4PuxtpqsXu2Df8EY5W2siGWbGo0OKLsql4ivxRvUN7QfDTwD JRGb+u5NlQXS5u1WE43FVQ== 0000950129-95-000655.txt : 19950615 0000950129-95-000655.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950129-95-000655 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950430 FILED AS OF DATE: 19950614 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGICON INC CENTRAL INDEX KEY: 0000028866 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 760343152 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07427 FILM NUMBER: 95546921 BUSINESS ADDRESS: STREET 1: 3701 KIRBY DR STREET 2: STE 112 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7135265611 MAIL ADDRESS: STREET 1: 3701 KIRBY DRIVE SUITE 112 CITY: HOUSTON STATE: TX ZIP: 77098 10-Q 1 DIGICON INC. 10-Q DATED 04/30/95 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1995 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 DIGICON INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0343152 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3701 KIRBY DRIVE, SUITE #112, HOUSTON, TEXAS 77098 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 526-5611 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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 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. CLASS OUTSTANDING AT JUNE 13, 1995 Common Stock, $.01 par value 10,276,442 ================================================================================ 2 DIGICON INC. AND SUBSIDIARIES INDEX
Page Number ------ PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - April 30, 1995 and July 31, 1994 1 Statements of Consolidated Operations - For the Three and Nine Months Ended April 30, 1995 and 1994 3 Consolidated Statements of Cash Flows - For the Nine Months Ended April 30, 1995 and 1994 4 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. Other Information Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGICON INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) April 30, July 31, 1995 1994 ----------- -------- ASSETS (In thousands of dollars) Current assets: Cash $ 2,243 $ 8,365 Restricted cash investments 660 320 Accounts and notes receivable (net of allowance for doubtful accounts: April, $568, July, $701) 38,683 30,427 Accounts and note receivable from FSU joint venture, current portion 1,087 443 Materials and supplies inventory (net of reserves: April, $66, July, $68) 1,646 5,410 Prepayments and other 6,671 4,692 -------- -------- Total current assets 50,990 49,657 Property and equipment: Seismic equipment 48,895 48,622 Data processing equipment 27,519 27,795 Seismic ships 8,291 Leasehold improvements and other 30,593 30,809 -------- -------- Total 107,007 115,517 Less accumulated depreciation 62,894 66,625 -------- -------- Property and equipment - net 44,113 48,892 Proprietary seismic data 27,335 19,638 Investment in FSU joint ventures 11,069 8,478 Goodwill (net of accumulated amortization: April, $1,061; July, $743) 3,184 3,502 Other assets 1,321 802 Note receivable from FSU joint venture 593 887 -------- -------- Total $138,605 $131,856 ======== ========
- ------------ See Notes to Consolidated Financial Statements. 1 4
(Unaudited) April 30, July 31, 1995 1994 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands of dollars) Current liabilities: Short-term related party loans $ 1,673 $ 2,695 Current maturities of long-term debt 10,530 6,166 Accounts payable - trade 21,847 23,740 Accrued interest 563 293 Other accrued liabilities 10,699 9,205 Income taxes payable 1,054 1,406 --------- --------- Total current liabilities 46,366 43,505 Non-current liabilities: Long-term debt-less current maturities 23,929 23,922 Deferred credits 5,124 5,538 Other non-current liabilities 395 341 --------- --------- Total non-current liabilities 29,448 29,801 Stockholders' equity: Common stock, $.01 par value; April - authorized: 20,000,000 shares; issued: 11,134,939 shares; July - authorized: 60,000,000 shares; issued: 31,352,273 shares 111 314 Additional paid-in capital 71,895 69,366 Accumulated deficit from August 1, 1991 ($139,751 deficit eliminated in quasi-reorganization on July 31, 1991) (9,215) (11,130) --------- --------- Stockholders' equity 62,791 58,550 --------- --------- Total $ 138,605 $ 131,856 ========= =========
- ------------ See Notes to Consolidated Financial Statements 2 5 DIGICON INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS UNAUDITED (In thousands, except per share amounts)
Three Months Ended Nine Months Ended April 30, April 30, ------------------------- -------------------------- 1995 1994 1995 1994 -------- -------- -------- --------- Revenues $ 34,448 $ 25,463 $ 96,714 $ 88,212 Costs and expenses: Operating expenses: Other 27,767 25,250 75,476 77,496 Restructuring 7,886 7,886 Depreciation and amortization 3,469 3,541 10,315 10,475 Selling, general and administrative 1,244 1,156 3,408 3,719 Interest 1,343 672 3,844 1,847 Equity in loss of 50% or less- owned companies and joint ventures 185 169 825 159 Other - net (69) (1) (143) (381) -------- -------- -------- --------- Total costs and expenses 33,939 38,673 93,725 101,201 -------- -------- -------- --------- Income (loss) before provision for income taxes 509 (13,210) 2,989 (12,989) Provision for income taxes 30 478 1,074 964 -------- -------- -------- --------- Net income (loss) $ 479 $(13,688) $ 1,915 $ (13,953) ======== ======== ======== ========= Income (loss) per share of common stock $ .04 $ (1.40) $ .17 $ (1.46) ======== ======== ======== ========= Weighted average shares (includes common stock only) 11,135 9,768 11,075 9,540 ======== ======== ======== ========= Cash dividends None None None None ======== ======== ======== =========
- ------------ See Notes to Consolidated Financial Statements. 3 6 DIGICON INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Nine Months Ended April 30, 1995 1994 -------- -------- (In thousands of dollars) Operating activities: Net income (loss) $ 1,915 $(13,953) Non-cash items included in income (loss): Income taxes added to paid-in capital 5 Depreciation and amortization 10,315 10,475 Gain on disposition of assets (70) (405) Equity in loss of 50% or less-owned companies and joint ventures 825 159 Write-down of proprietary seismic data to market 297 258 Write-off/reserve for impairment of assets 6,523 Restructuring accrual (786) 1,363 Amortization of warrants issued with short-term related party loans 77 Change in operating assets/liabilities: Accounts and notes receivable (5,079) 5,036 Accounts and note receivable from FSU joint venture 59 Materials and supplies inventory 139 501 Prepayments and other (1,979) (735) Proprietary seismic data (7,994) (8,210) Other 407 202 Accounts payable - trade (2,944) (8,848) Accrued interest 270 39 Other accrued liabilities 1,176 3,747 Income taxes payable (352) 302 Deferred credits (415) (1,188) Other non-current liabilities 52 -------- -------- Total cash used in operating activities (4,087) (4,729)
See Notes to Consolidated Financial Statements. 4 7 DIGICON INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) UNAUDITED
Nine Months Ended April 30, 1995 1994 -------- -------- (In thousands of dollars) Financing activities: Borrowings of short-term related party loans $ 30 $ 3,386 Payments of short-term related party loans (1,052) (3,386) Payments of long-term debt (4,000) (2,447) Borrowings of long-term debt 926 Net borrowings under revolving credit agreement 3,430 4,995 Common stock issue costs (72) ------- ------- Total cash provided by (used in) financing activities (1,664) 3,474 Investing activities: Purchase of property and equipment (2,618) (3,854) Sale of property and equipment 1,207 979 (Increase) decrease in restricted cash investments (340) 307 Increase in investment in FSU joint ventures (1,673) (494) Sale to Syntron, Inc.: Inventories and technologies 1,591 Property and equipment 1,409 ------- ------- Total cash used in investing activities (424) (3,062) Currency (gain) loss on foreign cash 53 (84) ------- ------- Change in cash and cash equivalents (6,122) (4,401) Beginning cash and cash equivalents balance 8,365 5,402 ------- ------- Ending cash and cash equivalents balance $ 2,243 $ 1,001 ======= =======
- ------------ See Notes to Consolidated Financial Statements. 5 8 DIGICON INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Nine Months Ended April 30, 1995 1994 ---------- ---------- (In thousands of dollars) SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase in property and equipment due to: Execution of capital leases and notes $ 4,894 $3,059 Accounts payable - trade 133 641 Increase (decrease) in investment in FSU joint ventures: Common stock issued 2,309 7,299 Accounts and note receivable from FSU joint venture (409) Long-term debt 245 Accounts payable - trade 739 Sale of inventories, property and equipment and technologies to Syntron, Inc.: Accounts and notes receivable 3,255 Inventories (2,034) Other assets - deferred credits receivable 857 Accounts payable - trade 957 Other accrued liabilities - deferred gain 1,011 Other non-current liabilities - deferred gain 110 Sale of accounts receivable and property and equipment to minority shareholder: Accounts and notes receivable (78) Property and equipment - net (247) Long-term debt (199) Accounts payable - trade (18) Other non-current liabilities - minority interest (108) Warrants issued with short-term related party loans (89) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the nine months ended for: Interest - Secured term loan 473 439 Revolving credit facilities 1,449 338 Secured short-term related party loans 213 Equipment purchase obligations and unsecured notes payable 766 679 Other 747 148 Income taxes 1,431 1,134
6 9 DIGICON INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPINION OF MANAGEMENT In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Digicon Inc. and subsidiaries at April 30, 1995, and the results of its operations for the three and nine month periods and its cash flows for the nine month periods ended April 30, 1995 and 1994. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year, as such results could be affected by changes in demand for geophysical services and products, which is directly related to the level of oil and gas exploration and development activity. Governmental actions, foreign currency exchange rate fluctuations, seasonal factors, weather conditions and equipment problems also could impact future operating results. INCOME (LOSS) PER SHARE Weighted average shares and primary income (loss) per share have been restated for all periods presented to reflect the effect of a one for three reverse stock split consummated on January 17, 1995. See Note 9. Primary loss per share is computed based on the weighted average number of shares of common stock. Primary income per share is computed based on the weighted average number of shares of common stock plus common stock equivalents. Common stock equivalents include stock options and warrants. Shares issuable upon the conversion of stock options and warrants were disregarded since the treasury stock method of calculation produced no incremental shares. Fully diluted income per share is not presented since common stock equivalents had no dilutive effect or due to net losses. 2. SHORT-TERM RELATED PARTY LOANS The short-term related party loans are secured on a subordinated basis by a majority of the assets of the Company. Interest is payable at prime plus 6% (15% at April 30, 1995). The loans are subject to mandatory prepayment from a portion of the proceeds of certain specified transactions, if and when such transactions occur, and beginning January 26, 1995, out of excess cash flow (as defined in the loan agreement) earned during the period beginning August 1, 1994. As further consideration for the facility, the Company issued 120,000 common stock purchase warrants (as adjusted for the one for three reverse stock split consummated on January 17, 1995) expiring July 26, 1999 with an exercise price of $4.50. The short-term related party loans were repaid in full on June 13, 1995. 7 10 3. LONG-TERM DEBT The Company's long-term debt is as follows:
April 30, July 31, 1995 1994 --------- -------- (In thousands of dollars) Revolving credit agreement due April 1997, at prime plus 3% (12% at April 30, 1995) $15,902 $12,446 Secured term loan due June 1997, at 10.75% 6,000 6,000 Secured Indonesian Rupiah revolving credit agreement due September 1995, at 19% 896 922 Unsecured notes maturing through January 1995, at 10% 35 Equipment purchase obligations maturing through February 1999, at an average rate of 10.81% at April 30, 1995 11,661 10,605 Real estate note maturing April 1995, at prime plus 1.25% 80 ------- ------- Total 34,459 30,088 Less current maturities 10,530 6,166 ------- ------- Due after one year $23,929 $23,922 ======= =======
The revolving credit agreement is with a finance company and provides a revolving credit facility of up to $15,000,000 through April 11, 1997. The facility has been increased to $17,000,000 for a six month period ending on September 15, 1995. Advances under the agreement are limited by a borrowing formula and are secured by a majority of the assets of the Company. The agreement limits, among other things, the Company's right, without consent of the lender, to take certain actions, including creating indebtedness, prohibits paying certain dividends and requires the Company to maintain certain financial ratios. At April 30, 1995, the Company was not in compliance in respect to the current ratio required under the agreement; however, the Company has obtained a waiver for the quarter ended April 30, 1995. The agreement also provides for the deposit of collections of certain of the Company's accounts receivable into cash collateral accounts and for the repayment of outstanding advances and monthly interest with such proceeds. Amounts applied against outstanding advances are available for reborrowing upon presentation of evidence of adequate borrowing base coverage. The secured term loan is due June 30, 1997, with interest at 10.75% payable quarterly. Principal payments of $1,500,000 are due June 30, 1995 and June 30, 1996, and all 8 11 remaining unpaid principal is due June 30, 1997. The note agreement limits, but does not prohibit, the Company's ability to pay dividends and to incur indebtedness for borrowed money and requires the Company to maintain certain financial ratios. At April 30, 1995, the Company was not in compliance in respect to the debt coverage ratio required under the agreement; however, the Company has obtained a waiver for the quarter ended April 30, 1995. In April 1994, in conjunction with the execution of the revolving credit agreement, the lender was granted a security interest in a majority of the Company's equipment. In connection with the original sale of the notes, the Company issued 113,333 common stock purchase warrants (as adjusted for the one for three reverse stock split consummated on January 17, 1995) to the lender. The secured Indonesian Rupiah revolving credit facility in the amount of two billion Rupiahs is the obligation of P.T. Digicon Mega Pratama, a consolidated subsidiary of the Company, and provides working capital and certain bank guarantees for its Indonesian operations. The facility expires in September 1995, and is secured by substantially all of the assets of P.T. Digicon Mega Pratama and the guaranty of Digicon Inc. The Company's equipment purchase obligations represent installment loans and capitalized lease obligations primarily related to computing and seismic equipment. 4. OTHER - NET Other - net consists of the following:
Three Months Ended Nine Months Ended April 30, April 30, ------------------------- ------------------------- 1995 1994 1995 1994 ---------- ---------- -------- -------- (In thousands of dollars) (In thousands of dollars) Net foreign currency exchange (gains) losses $ (31) $ 52 $ 60 $ 67 Net (gains) losses on disposition of property and equipment 17 (36) (70) (405) Interest income (48) (23) (133) (59) Other (7) 6 16 ----- ----- ------ ------ Other - net $ (69) $ (1) $ (143) $ (381) ===== ===== ====== ======
5. RESTRICTED CASH Restricted cash represents amounts pledged as collateral on certain bank guarantees. 9 12 6. SALE OF INVENTORIES, ASSETS AND TECHNOLOGIES On August 31, 1994, the Company entered into a series of agreements with Syntron, Inc. ("Syntron") that provided for the sale of certain assets, inventories, and technologies by the Company to Syntron and the assumption of certain liabilities by Syntron. The sale price was $7,500,000 payable in cash of $3,000,000 and $4,500,000 in credits to be applied against future purchases by the Company in accordance with contract terms. The agreements also provide that for a period of three years, Syntron will be the sole supplier to the Company of certain acquisition, monitoring, and recording equipment that is competitively priced, deliverable on a timely basis and is technologically competitive. In addition, the Company has agreed to lease back certain marine and land recording equipment from Syntron for a period of up to thirty-six months with minimum lease terms ranging from 7-1/2 to 17-1/2 months. The difference between the sale price and the net book value of the net assets sold after discounting the credits by 2-1/2% was a $1,121,000 gain which will be recognized ratably over the average minimum lease term. 7. INVESTMENT IN FSU JOINT VENTURES During the year ended July 31, 1994, the Company entered into an agreement with MD Seis International Ltd. to focus on emerging geophysical opportunities throughout the former Soviet Union ("FSU"). In connection with the agreement, the Company placed 5,431,615 shares of its old common stock in escrow to be distributed in three stages upon the execution and completion of certain conditions. The first stage was completed on April 1, 1994 and the Company exchanged 3,072,950 shares of old common stock valued at $2.375 per share, or $7,298,256, and a $1,000,000 cash commitment in return for a 50% interest in MD Seis Geophysical Co., Ltd. (a Russian joint stock company) and Seismic Technology, Inc. (a Delaware corporation), a 25% interest in DG Seis Overseas, Ltd. (a Republic of Cyprus limited liability company) and a 10% indirect interest in Caspian Geophysical (an Azerbaijani joint venture). The second stage of the agreement was completed on August 25, 1994, and the Company increased its ownership interest to 50% in DG Seis Overseas, Ltd. and to a 20% indirect interest in Caspian Geophysical by exchanging 2,052,543 shares of old common stock valued at $1.125 per share, or $2,309,111, and an additional $2,000,000 cash commitment. In addition, the Company agreed to guarantee certain liabilities of the joint ventures. Both parties agreed not to pursue stage three and all remaining shares of old common stock were released back to the Company. After adjustment for the one for three reverse stock split consummated on January 17, 1995, MD Seis owned 1,708,497 shares of common stock. The investments were being accounted for under the equity method. The excess value of the purchase price over the fair value of the net assets acquired in the amount of $9,292,000 was being amortized over a twenty-year period. Amortization expense for the three and nine months ended April 30, 1995 was $120,000 and $360,000, respectively. The remaining unamortized balance of intangible assets at April 30, 1995 was $8,832,000. 10 13 On June 6, 1995 the Company sold its interests in the joint ventures for $6,000,000 in cash and the return of the 1,708,497 shares of common stock owned by MD Seis (valued at $5.125 per share). In addition, the Company received approximately $3,000,000 in short-term notes due on or before July 31, 1995 for amounts previously advanced to the joint ventures and will receive royalties of up to $1,500,000 based on future sales of speculative data currently being acquired by the joint ventures. The net effect of these transactions was a gain of approximately $4,000,000. On June 6, 1995 under a separate agreement, 850,000 of these shares were sold to institutional investors at a price of $4.6875 per share. 8. RESTRUCTURING CHARGES In response to operating losses and tightening cash flow during the year ended July 31, 1994, management made a decision to restructure its operations and revalue certain assets during that period and as a result incurred $9,116,000 in total expenses. Included in the $9,116,000 was $6,523,000 for the write-off/reserve for the impairment of assets to their net realizable value. A portion of the write-off pertained to marine ($2,437,000) and land ($552,000) acquisition assets related to decommissioned marine vessels and stacked land crews. The write-off/reserve for impairment of assets also included the write-down of certain other marine and land acquisition assets that were not a direct result of the restructuring program ($1,048,000). In addition, the Company wrote-down data processing equipment ($2,056,000) particularly in the Far East, based on a declining market, and Indonesian proprietary data since the Company's license to sell such data was not extended by the Indonesian government ($430,000). Also included in the $9,116,000 were accrued restructuring charges of $1,363,000 of which $1,226,000 related to severance costs for a 10% reduction in the Company's workforce and $137,000 related to the consolidation of certain offices. Approximately $1,061,000 of these amounts had been paid as of April 30, 1995 and the Company estimates that all remaining liabilities in the amount of $302,000 will be paid during fiscal 1995. The remaining costs of $1,230,000 were included in other operating expenses and included non-recurring expenses associated with certain contract liabilities and other impaired assets. 9. REVERSE STOCK SPLIT On December 14, 1994, shareholders approved a one for three reverse stock split (the "Reverse Split") to holders of record on January 17, 1995, with no change in par value. On January 17, 1995, there were 33,404,816 shares of common stock outstanding which were converted into approximately 11,134,939 shares of new common stock. The net effect of these transactions are a charge to common stock and a credit to additional paid-in capital of approximately $223,000. On January 17, 1995, there were 1,363,636 publicly traded common stock purchase warrants expiring on July 5, 1996 with an exercise price of $6.00 per share. In connection with the Reverse Split and as required by the American Stock Exchange, the publicly traded warrants were converted, effective January 17, 1995, into approximately 454,545 new common stock 11 14 purchase warrants with an exercise price of $18.00. Also on January 17, 1995, there were 340,000 common stock purchase warrants expiring on June 29, 1997 with an exercise price of $2.00 per share which were adjusted in connection with the Reverse Split to represent 113,333 shares of new common stock issuable upon exercise of these warrants at an exercise price of $6.00. Additionally, there were 1,975,000 and 600,000 shares of common stock authorized under the 1992 Employee Nonqualified Stock Option Plan and 1992 Non-Employee Director Stock Option Plan, respectively. In connection with the Reverse Split, these authorized shares were decreased to approximately 658,000 and 200,000 authorized shares of new common stock under the Employee Plan and Director Plan, respectively, and the exercise prices were tripled. 12 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The seismic industry and its role in petroleum exploration, development and production has changed substantially during recent years. Wider applications of seismic technology have strongly shifted the emphasis to three dimensional ("3D") surveys, and the greater precision and improved subsurface resolution obtainable from 3D seismic data have enabled oil companies to utilize these surveys to find new fields and to delineate more accurately existing fields and to augment their reservoir management and production monitoring techniques. It has been demonstrated that the enhanced subsurface resolution obtainable from 3D studies has been a key factor in improving success ratios and lowering finding and field extension costs for the oil industry during the past several years. The increased use of 3D seismic technology for development and production activities coupled with strengthening oil and gas prices contributed to seismic spending increases from 1988 to 1993, a period during which 3D surveys became the predominant practice offshore. In addition, the demand for land/transition zone 3D surveys has increased during the past two years. However, during calendar 1993, delayed offshore concession awards and tax changes in certain foreign countries, coupled with oil company budget shifts, reduced demand for marine surveys and, as a consequence, excess capacity developed in the marine geophysical market. The Company responded to these changes by shifting its geographic emphasis to the Western Hemisphere, by allocating substantial resources to build its land/transition zone business and by reducing the number of vessels in operation. The Company has reduced its fleet from nine vessels to five and is presently utilizing 60% of the fleet in Gulf of Mexico 3D operations. The Far East marine market has strengthened in the past year and two of the Company's vessels are currently operating in that area. International operations accounted for 55% of revenues in 1994, down from 77% in 1993 and 87% in 1992. In the first nine months of fiscal 1995, international operations accounted for 51% of total revenues. As a result of further reductions in oil company budgets which have reduced the amount of single customer contract work available, and the relatively large number of oil companies presently active in the Gulf of Mexico, the Company has shifted its emphasis to acquiring 3D data for its own library, where the potential exists for enhanced profitability resulting from multiple sales of each data set. To emphasize its expanded focus on the land/transition zone market, in October 1992, the Company added three domestic land/transition zone crews and subsequently further increased its onshore presence through the addition of three crews utilizing advanced-technology high capacity I/O System Two equipment. A total of five land crews are currently in operation, three in the United States and two in South America. A third South American crew resumed work in June 1995. As a result of this onshore focus, the Company's land revenues increased from approximately $3.1 million in fiscal 1992 to $38.5 million in fiscal 1994. In the first nine months of fiscal 1995, primarily as a result of stacking the Company's transition zone crew in Australia, land revenues were essentially equal to last year, and are expected to increase during the remainder of 1995 due to additional capacity in South America. At July 31, 1994, the Company's backlog of commitments for services was $84,500,000, compared with $77,800,000 13 16 at July 31, 1993. At April 30, 1995, backlog expanded further to $87,601,000, of which 31% related to contracts for land data acquisition, 40% to contracts for marine data acquisition and 29% to contracts for data processing. During 1995, the Company expects to spend approximately $18 million for capital expenditures and approximately $2.8 million for research and development activities. The majority of capital spending in 1995 will be for various vessel upgrades and additional data acquisition and processing equipment necessary to maintain existing levels of operation. In addition, as previously mentioned, a new I/O crew has been added in South America and an additional crew is being considered to replace obsolete domestic equipment. A substantial majority of the funding for the capital expenditures has been provided by vendor financing arrangements. Further additions to capacity will be considered only if increased market demand is evident and financing is available. In fiscal 1995, the Company also expects to invest approximately $20 million in its data library. During 1994, in conjunction with certain changes in senior management, the Company initiated a comprehensive program designed to restructure each of the Company's geographic and operational lines of business with the objective of restoring profitability to its operations. These actions included personnel reductions, office consolidations, vessel deactivations and redeployments and the movement to outsource certain costly manufacturing and research and development activities historically performed "in-house". The implementation of this program has resulted in cost savings which have increased to approximately $800,000 per month beginning in the second quarter of fiscal 1995. On June 6, 1995, the Company sold its interests in several joint venture companies which had been formed to pursue geophysical service contracts in the former Soviet Union ("FSU"). The Company concluded that while significant opportunities will eventually be developed in the FSU, the political and economic uncertainty currently existing in the FSU, coupled with the considerable amount of capital required to establish and maintain operations there, do not justify the near-term profit potential of that marketplace. In return for its joint venture interests, the Company received $6 million of cash and the return of the 1,708,497 shares of Digicon common stock which were issued in April and August 1994 in acquiring such interests. In addition, the Company received a note in the amount of $2,992,144 which is payable on or before July 31, 1995 and which represents payments for equipment sold and a return of amounts previously advanced to the joint venture companies. The Company also received a royalty of up to $1.5 million based upon future sales of speculative data currently being acquired in the Caspian Sea. The Company has subsequently sold 850,000 shares of the common stock received in the FSU transaction to institutional investors at a price of $4.6875 per share. See Financial Condition, Liquidity and Capital Resources. On August 31, 1994, the Company sold its cable and canister manufacturing and repair facility and certain of its marine and land data acquisition equipment, related data acquisition technology and associated inventory to Syntron, Inc. ("Syntron"). In connection with the transaction, the 14 17 Company's marine and land engineering groups, totaling 37 people, were transferred to Syntron. The total sales price was $7,500,000, of which $3,000,000 was received in cash at closing, with the remainder payable in credits to be applied against future purchases of advanced technology digital recording equipment manufactured by Syntron. Depending on market conditions during the next 24 months, the Company expects to upgrade its vessels to Syntron equipment valued, in total, at approximately $21 million. Syntron has agreed to finance a significant portion of the purchase price of this equipment. Prior to upgrading its vessels with Syntron equipment, the Company is leasing from Syntron certain equipment currently in use which was sold pursuant to this transaction, at rates approximating the depreciation charges previously being recognized on such equipment. See Note 6 to the Consolidated Financial Statements. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES For financial reporting purposes, the Company has previously accrued income taxes in respect of its marine data collection operations in Mexico during fiscal 1992 and 1993 based on the amount of income taxes withheld by its client, the state owned oil company. The Company believes that the income taxes withheld (which total approximately $2,600,000) far exceed the taxes, if any, which are due by the Company in respect of its operations in Mexico. In September 1992, the Company filed suit to recover all income taxes withheld, and on June 3, 1993, the Company was notified that the tax court in Mexico had issued a ruling which appears to support the claim for recovery. Both the Mexican tax authorities and the Company sought clarification of the ruling from the appellate court in Mexico, and based on the appellate court's ruling in November 1993, it appears that the Company's position has again been supported. Based on the court rulings, the Company is continuing proceedings necessary to enforce compliance with the court rulings and recover the income taxes withheld. Although the court rulings are a favorable development, there is no assurance that the Company will recover any significant portion of the withheld taxes or, if such recovery is made, as to the timing of receipt. The Company intends to continue to seek recovery of the withheld taxes but does not presently intend to reflect any anticipated refunds thereof as a reduction in income taxes until such time, if ever, that the excess amounts withheld are received. The Company has required increased amounts of working capital to support its operations and its capital expenditure and research and development programs. The Company has a significant presence (55% of fiscal 1994 revenues) outside of the United States, where operations typically require greater amounts of working capital than similar domestic activities, as the average collection period for foreign receivables is generally longer than for comparable domestic accounts. In addition, the Company has increased its participation in non-exclusive data surveys and has significantly expanded its library of proprietary data. Because of the lead time between survey execution and sale, non-exclusive surveys generally require greater amounts of working capital than contract work. Depending on the timing of future sales of the data and the collection of the proceeds from such sales, the Company's liquidity will continue to be affected; however, the Company believes that these non-exclusive surveys have good long-term sales, earnings and cash flow potential. During the past three years, the Company has updated and increased its data processing capabilities, invested significant capital to outfit a new seismic vessel and has, more recently, 15 18 allocated significant resources to its land/transition zone activities. In fiscal 1993 and 1994, the Company spent a total of $51 million for new capital equipment and invested approximately $9.1 million in its research and development efforts. The Company's anticipated capital expenditures for fiscal 1995 of approximately $18 million provide primarily for the maintenance of existing levels of capacity, a major upgrade to one vessel's acquisition system and the addition of one land crew, with a second crew being considered depending on market conditions and the availability of financing. Further additions to capacity will be dependent upon oil company demand for geophysical services and the availability of funding. The Company's internal sources of liquidity are cash balances ($2,243,000 at April 30, 1995) and cash flow from operations ($1,665,000 in the third quarter of fiscal 1995 and expected to be positive for the remainder of the fiscal year ended July 31, 1995), and its external sources include the unutilized portion of its working capital facility described below (approximately $11,000,000 on June 12, 1995), equipment purchase obligations, asset dispositions and trade credit. To provide additional working capital, in April 1994, the Company obtained a three year, $15 million revolving credit facility from a commercial finance company. The facility provides for borrowings of up to 80% of the majority of the Company's domestic and foreign receivables at an interest rate of three percent over the prime rate and is secured by most of the Company's world-wide assets. In March 1995, the lender agreed to increase the facility to $17 million for a six month period ending September 15, 1995. To provide additional funding to enable the Company to continue to add to its Gulf of Mexico data library, on July 26, 1994, the Company and a lending group comprised of three significant stockholders of the Company, entered into a short-term bridge loan agreement. The agreement provided for $3,000,000 of advances, of which $2,725,000 was borrowed, secured on a subordinated basis by the majority of the Company's assets. The loan was subsequently paid down by $1,052,000 on September 7, 1994 and was extended until July 26, 1995. Interest was initially payable at the rate of three percent over prime and was increased to six percent over prime on January 26, 1995. In addition, the lenders were issued 120,000 5-year warrants (as adjusted for the one for three reverse stock split consummated on January 17, 1995) to purchase shares of common stock at $4.50 per share. The remaining balance of the facility ($1,673,000) was repaid on June 13, 1995 and no further amounts are available under the facility. In connection with the sale of the Company's joint venture interests in the FSU discussed previously, 1,708,497 shares of common stock were returned to the Company. Subsequently, on June 6, 1995, 850,000 of these shares were sold to institutional investors at a price of $4.6875 per share. Net proceeds of these sales, totaling $3,984,375, were initially utilized to increase the Company's liquidity and to reduce the Company's outstanding indebtedness. The Company believes that as a result of the cash generating and expenditure reducing transactions concluded in the past fifteen months, including the sale of common stock, the disposition of the Company's investment in the FSU joint ventures, the restructuring and expense 16 19 reduction program, the expanded revolving credit agreement, the sale of assets and transfer of certain research functions to Syntron, and other asset dispositions, it has strengthened its working capital position. Absent a deterioration in the Company's markets, the Company believes that it possesses sufficient liquidity to continue operations on a satisfactory basis. However, if additional working capital were to become necessary as a result of deterioration in demand for or pricing of the Company's services, and if additional financing were not available, the Company's operating results and financial condition could be adversely affected. 17 20 RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 1995 Resulting primarily from increased sales from the Company's library of proprietary data, revenues from data processing operations, the addition of a new South American land crew and a reduction in operating expenses (which included restructuring charges in the prior year), the Company's earnings improved during the third quarter compared with the third quarter of the prior year. Net income was $479,000 or $.04 per share in the current quarter as compared to a net loss of $13,688,000 or $1.40 per share (as adjusted for the one for three reverse stock split on January 17, 1995) in the prior year's quarter. Revenues increased $8,985,000 and total costs and expenses decreased $4,734,000 on a comparable quarter basis. Revenues of $8,427,000 from the sale of non-exclusive surveys quadrupled during the current quarter compared to the prior year. Revenues attributable to the sale of proprietary data have increased from 8% of total revenues in the prior year's quarter to 24% of total revenues during the current quarter. The increase is primarily attributable to the sale of data collected in non-exclusive surveys in the Gulf of Mexico. The Company expects revenues from the sale of proprietary data to continue to improve during the fourth quarter (compared to the fourth quarter of the prior year), as additional surveys are completed and available for sale. Data processing revenues increased $1,871,000 or 25% during the quarter. The increase was mainly attributable to the installation of additional capacity provided by massively parallel data processing systems in the Company's centers in Houston and Singapore. In addition, the Company was awarded a new processing contract at its Assen, Holland center in the second quarter of 1995. The Company expects revenues to continue to improve in these centers and introduced a new land software product during the current quarter which should further increase data processing revenues. The improved revenues from these centers were partially offset by lower revenues in soft Indonesian markets. The Indonesian market has been depressed for some time and the Company will continue to scale back its operations in that area. Land revenues for the third quarter of 1995 increased approximately $1,229,000 or 14%. The increase was mainly attributable to the addition of a new I/O System Two crew in Argentina. The crew which operated in Bolivia in the prior year assisted in Argentina during the current year's quarter on a large 3D job and will return to Bolivia during the fourth quarter to complete a new 2D contract. With the additional crew in place, the Company expects its revenues from South America to improve during the fourth quarter. Revenues from the North American land crews decreased slightly due to the consolidation of two domestic crews and work delays experienced by another crew. During the fourth quarter, the Company anticipates that revenues from its North American operations will be consistent with the third quarter . Marine revenues from contract work decreased overall by approximately $329,000 or 5% during the third quarter of 1995. The Company derigged one of its seismic vessels in April 1994 which contributed to lower current quarter revenues. In addition, during the first quarter of 1995, the Company mobilized a vessel, which operated on funded surveys in the North Sea in the prior year, to the Gulf of Mexico to join three of its other vessels in collecting non-exclusive surveys in the area. The Company also experienced lower production due to undershooting obstructions and bad weather during the current quarter. In March 1995, the Company mobilized one of the 18 21 vessels from the Gulf of Mexico to the Far East where it will perform a series of contracts beginning in the fourth quarter. The Company continues to operate a vessel in the Far East where improved market conditions almost doubled revenues in the third quarter of 1995. Marine revenues for the fourth quarter are expected to remain consistent due to the scheduled maintenance of one vessel during June and the conversion of another vessel to a Syntrak 480 acquisition system in July. Operating expenses - other for the third quarter of 1995 increased $2,517,000 or 10% from the third quarter of 1994 consistent with fluctuations in revenues; however, profit margins increased from 1% in the prior quarter to 19% in the current quarter primarily as a result of cost savings related to a major restructuring program implemented during the prior fiscal year. The program included the write-off/reserve for impairment of assets to their net realizable value, a reduction in the work force, and the consolidation of certain offices in all operations. In addition, in September 1994, the Company sold the inventories, assets and technologies related to its manufacturing operations and transferred the related personnel to the buyer. The Company estimates that the savings from this program is approximately $800,000 per month. Depreciation and amortization expense declined slightly during the current quarter as decreases in charges resulting from the restructuring program and the derigging of the seismic vessel were offset by an increase in charges on new asset purchases and amortization on the FSU joint ventures. Primarily as a result of increased borrowings of working capital facilities and equipment financing and higher interest rates, interest expense increased $671,000 during the current quarter. Increases in other - net for the current quarter consists mainly of net currency gains attributable to the increase in value of the pound sterling. Current quarter income taxes relate primarily to operations in the Far East due to increased marine revenues as discussed above offset by decreases in South American taxes. Income taxes in the prior year related primarily to South American operations. 19 22 NINE MONTH PERIOD ENDED APRIL 30, 1995 During the first nine months of fiscal 1995, the Company's net income was $1,915,000 or $.17 per share compared to a net loss of $13,953,000 or $1.46 per share (as adjusted for the one for three reverse stock split) in the comparable period of the prior year. Revenues increased $8,502,000 and total costs and expenses decreased $7,476,000 in the current year. Revenues from the sale of proprietary data increased $7,278,000 or 84% during the current year. The increase is primarily attributable to the sale of data collected in non-exclusive surveys in the Gulf of Mexico and in the North Sea. Processing revenues increased $5,039,000 or 23% over the same period in 1994. The increase is mainly attributable to the installation of additional capacity in Houston and Singapore and the availability of additional marine data in the Gulf of Mexico. In addition, the Company was awarded a new processing contract at its Assen, Holland center. The improved revenues from these centers were partially offset by lower revenues in European and Indonesian markets. Marine contract revenues decreased approximately $3,113,000 or 11% during the nine month period. The Company derigged two of its seismic vessels in September 1993 and April 1994, respectively. In addition, during the first quarter of 1995 the Company mobilized a vessel which operated on funded surveys in the North Sea in the prior year to the Gulf of Mexico to join three of its other vessels in collecting non-exclusive surveys in the area. The Company also experienced lower production due to undershooting obstructions and bad weather during the third quarter of the current year and mobilized a vessel in the last half of the current quarter from the Gulf of Mexico to the Far East. These decreases were partially offset by significantly improved performance by the Company's vessel in the Far East which benefited from improved market conditions. Land revenues for the nine months ended April 30, 1995 did not change materially from the prior period. The addition of a new crew contributed to a 40% increase in revenues generated in South America. However, this increase was offset by reduced revenues as a result of the elimination of an Australian crew and the consolidation of two domestic land crews. Profit margins improved from 12% in the prior year to 22% in the current period as operating expenses - other decreased $2,020,000 or 3% during the nine months ended April 30, 1995 primarily as a result of the previously mentioned restructuring program. Depreciation and amortization expense declined slightly during the current year as decreases in charges related to the restructuring program and the derigging of the seismic vessels were offset by an increase in charges on new asset purchases and amortization on the FSU joint ventures. Selling, general and administrative expense decreased $311,000 during the current period compared to the prior year period primarily due to the accrual in the prior year of benefits payable over five years under an employment contract with a former executive. Primarily as a result of increased borrowings in working capital facilities and equipment financing and higher 20 23 interest rates, interest expense increased $1,997,000 during the current nine month period. As previously discussed, in April 1994, the Company acquired interests in four joint ventures that operate in the former Soviet Union. In acquiring these interests, the Company exchanged common stock and cash commitments valued in excess of the fair market value of the net assets received. The excess value is being amortized over a twenty-year period and the Company has recorded $360,000 of amortization expense during the current nine-month period. The joint ventures are in the start-up phase and the Company has recorded $847,000 of equity losses during the current year. In June 1995, the Company disposed of its FSU interests. (See Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview.) Decreases in other - net for the current year period relate mainly to net gains recorded on the sale of certain seismic equipment in the prior year. Current year income taxes relate primarily to operations in the Far East based on increased marine revenues as discussed above and a charge relating to a tax assessment rendered in Jakarta. Prior year income taxes relate primarily to operations in South America. 21 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings As of June 13, 1995, the Company was not a party to, nor was its property the subject of, any material pending legal proceedings, as defined by relevant rules and regulations of the Securities and Exchange Commission. Item 6. Exhibits and Reports on Form 8-K a) Exhibits filed with this report: 10-a) Stock Purchase Agreement dated June 6, 1995 by and among Digicon Inc. and MD Seis International relating to the sale, by the Company, of its interests in certain joint ventures established to pursue business opportunities in the former Soviet Union. 11) Computation of income (loss) per common and common equivalent share for the three and nine months ended April 30, 1995 and 1994. 27) Financial Data Schedule for the period ended April 30, 1995 (filed electronically herewith). b) Reports on Form 8-K 1) There were no reports filed on Form 8-K during the quarter ended April 30, 1995. 22 25 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. DIGICON INC. --------------------------------- (Registrant) Date: June 14, 1995 Stephen J. Ludlow ----------------- --------------------------------- Stephen J. Ludlow (President) Date: June 14, 1995 Richard W. McNairy ----------------- --------------------------------- Richard W. McNairy (Principal Financial Officer) 23 26 Index to Exhibits Exhibit Description 10-a) Stock Purchase Agreement dated June 6, 1995 by and among Digicon Inc. and MD Seis International relating to the sale, by the Company, of its interests in certain joint ventures established to pursue business opportunities in the former Soviet Union. 11) Computation of income (loss) per common and common equivalent share for the three and nine months ended April 30, 1995 and 1994. 27) Financial Data Schedule for the period ended April 30, 1995 (filed electronically herewith). EX-10.A 2 STOCK PURCHASE AGREEMENT DATED 06/06/95 1 EXHIBIT 10-a STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (the "Agreement") is entered into as of June ____, 1995, by and among Digicon Inc., a Delaware corporation ("Digicon") and MD Seis International Limited, an Isle of Man, British Isles company ("MDSI"). The parties hereto shall be referred to herein collectively as the "Parties" and individually as a "Party". R E C I T A L S A. Digicon owns fifty percent (50%) of the issued and outstanding capital stock of each of DG Seis Overseas Limited ("DG Seis"), Seismic Technology, Inc. ("STI") and MD Seis Geophysical Co. Ltd ("MD Seis Geophysical" and, together with DG Seis and STI, the "Subsidiaries"). B. MDSI owns fifty percent (50%) of the issued and outstanding capital stock of DG Seis and STI. C. Digicon wishes to sell to MDSI, and MDSI wishes to purchase from Digicon, all of Digicon's interest in each of the Subsidiaries (the "Interest"), in exchange for which Digicon shall receive from MDSI (i) a promissory note made by MDSI in the original principal amount of six million United States of America dollars (U.S. $6,000,000.00) payable to Digicon (the "Note"), which note shall be paid in full at Closing (as defined below), (ii) that certain seismic data override of one and one-half percent of the gross proceeds (such gross proceeds to be calculated net all value added tax) of all future sales of the first sixteen thousand (16,000) kilometers in offshore Azerbaijan of speculative data acquired by Caspian Geophysical, an Azeri-Cypriot joint venture, up to a maximum of one million five hundred thousand United States of America dollars (U.S. $1,500,000.00) (the "Seismic Data Override") and (iii) five million one hundred twenty-five thousand four hundred ninety-three (5,125,493) shares of (pre-three to one (3:1) reverse split) Digicon common stock held by MDSI (the "Digicon Shares"). NOW, THEREFORE, in consideration of the above premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. Purchase and Sale of the Interest. Upon the terms and subject to the conditions of this Agreement, Digicon shall sell, transfer and deliver to MDSI, and MDSI shall purchase from Digicon, (a) five thousand (5,000) ordinary shares of DG Seis, par value one Cyprus Pound (CYP 1.00-) per share, (b) fifty (50) shares of STI, with no par value per share, and (c) five hundred (500) ordinary registered shares of MD Seis Geophysical (the "Geophysical Shares"), par value forty eight thousand (48,000) rubles per share, representing all of the shares of capital stock held by Digicon in each of the Subsidiaries. At the Closing (as defined below), Digicon shall deliver to MDSI certificates for each of five thousand (5,000) ordinary shares of DG Seis and fifty (50) shares of STI, which certificates shall have attached thereto the appropriate stock powers in form reasonably satisfactory to MDSI, duly executed in blank and in proper form for transfer. At the Closing (as defined below) Digicon shall deliver to MDSI documentation effecting the transfer of the Geophysical Shares. Digicon and its 2 respective successors and assigns will, at any time and from time to time after the Closing, do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney or assurances as may be reasonably required for better transferring, assigning, conveying, granting, assuring and confirming to MDSI the transfer of the Geophysical Shares. MDSI shall pay all stamp and other taxes, if any, that may be payable in respect of the sale and delivery to MDSI of the Interest. Digicon agrees that the transfer of capital stock from Digicon to MDSI contemplated in this Section 1 shall pass to MDSI good and marketable title to such shares of capital stock, free and clear of any claims, liens, security interests or other encumbrances. 2. Consideration and Payment for the Interest. a. Note. As part of the consideration (the "Purchase Price") for the Interest, at Closing (as defined below), MDSI shall deliver to Digicon the Note, which Note shall be in the form of Exhibit A hereto and be payable in full at Closing immediately after such delivery. b. Digicon Shares. As part of the Purchase Price for the Interest, at Closing (as defined below), MDSI shall transfer to Digicon the Digicon Shares. At the Closing, MDSI shall deliver to Digicon a certificate for five million one hundred twenty-five thousand four hundred ninety-three (5,125,493) shares of (pre three to one (3:1) reverse split) Digicon common stock, with a stock power attached thereto and duly executed in blank, in proper form for transfer. MDSI shall pay all stamp and other taxes, if any, that may be payable in respect of the sale and delivery to Digicon of the Digicon Shares. c. Royalty Agreement. As part of the Purchase Price, at Closing (as defined below), MDSI and Digicon shall have entered into a royalty agreement substantially in the form of Exhibit B hereto (the "Royalty Agreement") in connection with the Seismic Data Override. 3. Additional Covenants. a. Termination of Agreements. At Closing, Digicon and MDSI shall, and MDSI shall cause the parties which are party to the agreements referred to in clauses (i) through (vi) below to, terminate each of the following agreements, which termination shall be substantially in the form of Exhibit F hereto: i. The Stock Purchase and Corporate Operating Agreement (the "Operating Agreement") dated as of January 14, 1994, among Digicon, MDSI and certain affiliates of MDSI; ii. The Registration Rights Agreement dated as of January 14, 1994, between Digicon and Thomas A. Russell, as representative of the MD Seis Group (as such term is therein defined); 2 3 iii. Any technology license agreements executed pursuant to Section 3.1 of the Operating Agreement; iv. The Non-Compete and Right of First Refusal Agreement dated January 14, 1994, among Digicon, Central Geophysical Expedition, Nizam Ltd., Dr. Alexander Yu. Djaparidze, Dr. Boris G. Levin and Dr. Vazily Kh. Kivelidi; v. The letter agreement dated August 11, 1994, from Tarex, Inc. to DG Seis to the extent that such letter obligates Digicon to take any of the actions set forth in Section 5(a) of such letter agreement; vi. Any other document, instrument or agreement, oral or written, which (A) restricts the ability of Digicon to compete with MDSI, any of the Subsidiaries or any of their affiliates in any location (except as specifically provided in the Non-Competition Agreement to be executed and delivered pursuant to Section 6(b)(ii) of this Agreement) or (B) obligates Digicon to make capital contributions or to provide other financial support to or for the benefit of the Subsidiaries or (C) licenses or obligates Digicon to license SEISMIC TANGO or other software to MDSI, any of the Subsidiaries, Caspian Geophysical or any party affiliated with any of the foregoing. The foregoing agreements are to be terminated by agreement of the respective parties thereto, without further liability to any Party thereto except as expressly provided in this Agreement or the other documents and instruments executed pursuant hereto. b. Transfer of Certain Assets. The assets listed on Schedule 3(b) hereto (the "Extra Assets") were acquired in the name of Digicon at the request of the vendor of the Extra Assets. Digicon hereby acknowledges and agrees that the Extra Assets have at all times been (and are now) owned by DG Seis and not by Digicon and that Digicon has not caused any lien or encumbrance to be imposed upon the Extra Assets except in favor of the vendor thereof. Digicon hereby agrees to take such action as may be reasonably requested by MDSI or DG Seis to evidence that Digicon claims no interest in the Extra Assets. c. Payment of certain obligations. From time to time, Digicon has provided services and equipment, paid expenses and advanced funds to one or more of the Subsidiaries. As of the Closing Date, the aggregate amount owed by the Subsidiaries to Digicon with respect to such services, equipment, expenses and advances is U.S. $2,992,144.00. At the Closing, MDSI will cause PetroAlliance Services Company Limited, the joint venture to be organized pursuant to the Business Venture Agreement (as such term is hereinafter defined) ("Newco"), to issue to Digicon a promissory note in the form of Exhibit C hereto (the "Newco Note") payable to the order of Digicon in the amount of U.S. $2,992,144.00 to evidence the amount to be paid hereunder and Western Atlas International, Inc. ("WAII")shall issue its guarantee in the form of Exhibit D hereto with respect to the obligations of Newco. 3 4 d. Resignations. For each Subsidiary, Digicon shall cause all officers and directors nominated or appointed by Digicon to resign from the applicable office or directorship of such Subsidiary effective as of the Closing Date. e. Future operations. MDSI will ensure that none of the Subsidiaries will conduct any material operations after the Closing Date unless and until the appropriate Subsidiary changes its name to remove any and all indications of an affiliation of such Subsidiary with Digicon. 4. Closing. The closing of the transactions contemplated hereby (the "Closing") shall occur outside the territory of the United States of America on June 5, 1995 or on such other date as the Parties may agree (the "Closing Date"). At the Closing, this Agreement and all such further ancillary agreements, documents, exhibits, instruments, certificates and actions contemplated herein, shall be executed and delivered or taken as appropriate. 5. Representations and Warranties. a. Mutual Representations and Warranties. MDSI represents and warrants to Digicon, on the one hand, and Digicon, on the other hand, represents and warrants to MDSI as follows: i. Such Party has all requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby; ii. This Agreement has been duly executed and delivered by such Party and constitutes a valid and binding obligation of such Party, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws or equitable principles affecting the enforcement of creditors' rights generally; and iii. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not (i) violate any provision of any existing law, statute, rule, regulation or ordinance applicable to such Party or (ii) conflict with or result in any breach of or constitute a default under (A) any order, judgment, award or decree of any court, governmental authority, bureau or agency to which such Party is a party or by which such Party may be bound, or (2) contract or other agreement or undertaking to which such Party is a party or by which such Party may be bound; iv. Such Party has not, nor have any of its officers, directors, stockholders, employees or other agents on its behalf, employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby, except for obligations owed to Rockport Resources Corporation which are to be discharged by DG Seis; 4 5 v. There is no action, suit, proceeding or investigation pending or, to the best knowledge of such Party, threatened or pending against such Party which might materially and adversely affect the consummation of the transactions contemplated by this Agreement; and vi. Such Party has, and the transfer by such Party of shares of capital stock pursuant to the terms hereof, will pass to the other party, good and marketable title to such shares of capital stock, free and clear of any claims, liens, encumbrances, security interests, restrictions and adverse claims of any kind or nature whatsoever except that Digicon has granted a security interest in the Interest to Foothill Capital Corporation which will be terminated on or before the Closing Date. There are no outstanding subscriptions, options, warrants, rights, contracts, understandings or agreements to purchase or otherwise acquire such shares of capital stock, except for rights of first refusal in favor of various affiliates of MDSI which are contained in certain of the agreements described in Section 3(a) hereof which are to be terminated on the Closing Date. 6. Conditions Precedent. 1. Conditions Precedent -- Mutual. The Parties agree that the transactions contemplated by this Agreement and each of the Party's obligations relating thereto or in connection therewith shall be subject to the satisfaction in full prior to or at Closing of the following conditions precedent, which conditions may be waived in whole or in part by the consent of all the Parties, the non-satisfaction of which shall relieve each and every Party of any and all obligations relating to this Agreement; provided, however, that nothing herein shall relieve any party from liability for any breach of this Agreement. i. Qualification under State Securities Laws. All registrations, qualifications, permits and approvals required under applicable securities laws shall have been obtained for the lawful execution, delivery and performance of this Agreement. ii. Waiver and Release. The execution and delivery by Digicon, WAII and Newco of a Mutual Waiver and Release (the "Mutual Release") substantially in the form of Exhibit E attached hereto. iii. Additional Releases. At Closing, each of MD Seis and Digicon shall be released from any and all obligations relating to the Agreement on the Operation of a Joint Stock Company MD Seis Geophysical Co. Ltd. by and between Digicon and MD Seis pursuant to which MD Seis Geophysical was formed, which release shall be substantially in the form of the Mutual Release attached as Exhibit F hereto. iv. Material approvals. The Parties shall have received all material approvals, consents, exemptions or waivers by all governmental authorities required in connection with the transactions provided for in this Agreement, including the expiration of any applicable waiting period and no investigation, suit, action or other judicial or governmental proceeding shall be pending or 5 6 threatened which is likely to result in restraint, prohibition or the imposition of substantial penalties in connection with this Agreement or the transactions contemplated hereby. b. Conditions Precedent -- MDSI. The closing of the transactions contemplated by this Agreement and the obligations of MDSI relating thereto or in connection therewith shall be subject to the satisfaction in full of the following conditions precedent, any one or more of which may be waived in whole or in part by written consent of MDSI, the non-satisfaction of which shall relieve MDSI of any and all obligations relating to this Agreement; provided, however, that nothing herein shall relieve MDSI from liability for any breach of this Agreement. i. Business Venture Agreement. The simultaneous closing of the transactions contemplated by that certain Business Venture Agreement (the "Business Venture Agreement") by and between the MD Seis Group (as defined therein) and WAII. ii. Noncompetition Agreement. The execution and delivery by Digicon of a noncompetition agreement (the "Noncompetition Agreement") substantially in the form of Exhibit G attached hereto. iii. Representations and Warranties. All representations and warranties of Digicon shall continue to be true and correct in all material respects as of the Closing. iv. Compliance. Digicon shall have performed in all material respects all its obligations under this Agreement which are to be performed on or prior to the Closing. v. Certificate. The execution and delivery by Digicon of a certificate as to compliance with clauses (iii) and (iv) above. c. Conditions Precedent -- Digicon. The closing of the transactions contemplated by this Agreement and the obligations of Digicon relating thereto or in connection therewith shall be subject to the satisfaction in full of the following conditions precedent, any one or more of which may be waived in whole or in part by written consent of Digicon, the non-satisfaction of which shall relieve Digicon of any and all obligations relating to this Agreement; provided, however, that nothing herein shall relieve Digicon from liability for any breach of this Agreement. i. Issuance and Satisfaction of Note. The issuance by MDSI of the Note to Digicon and the payment in full of the amount to be paid pursuant thereto. ii. Transfer and Delivery of Digicon Shares. The transfer by MDSI to Digicon of the Digicon Shares in accordance with the terms of Section 2(b) hereof. iii. Newco Note. The delivery to Digicon of the Newco Note and the guaranty by WAII referred to in Section 3(c) of this Agreement. 6 7 iv. Guarantee of First Trimble GPS System. Newco shall have agreed to assume the obligation (the "First Obligation") heretofore undertaken by Digicon or its affiliates for the purchase of that certain Trimble GPS System for one hundred ninety-seven thousand one hundred twenty United States of America dollars and ninety-four cents (U.S. $197,120.94) (the "First GPS Payment"), pursuant to which Digicon and its affiliates shall be released from any and all liability based upon the First GPS Payment. v. Guarantee of Second Trimble GPS System. Newco shall have agreed to assume the obligation (the "Second Obligation") heretofore undertaken and guaranteed by DG Seis or its affiliates for the purchase of that certain Trimble GPS System for two hundred forty thousand eight hundred forty-five United States of America dollars and fifty-five cents (U.S. $240,845.55) (the "Second GPS Payment"), pursuant to which Digicon and its affiliates shall be released from liability, if any, based upon the Second GPS Payment. vi. Syntron Guarantees. WAII shall have agreed to substitute its guarantee (the "WAII Syntron Guarantee") for the guarantee of Digicon or its affiliates (the "Digicon Syntron Guarantee") in connection with that certain promissory note dated January 3, 1995 made by DG Seis in the original principal amount of three million five hundred fifty-seven eight hundred thirty-five United States of America Dollars and twelve cents (U.S. $3,557,835.12) payable to Syntron, Inc., pursuant to which WAII Syntron Guarantee Digicon and its affiliates shall be released from any and all obligations arising under the Digicon Syntron Guarantee in respect of payments which become due and payable after Closing. vii. Assumption of Vendor Contracts. Newco shall have assumed those certain vendor contracts set forth on Schedule 6(c)(vii) hereto in which Digicon is the purchaser of record. viii. Royalty Agreement. At Closing MDSI and Digicon shall have entered into the Royalty Agreement. xi. Representations and Warranties. All representations and warranties of MDSI continue to be true and correct in all material respects as of Closing. x. Compliance. MDSI shall have performed in all material respects all of its obligations under this Agreement which are to be performed on or prior to Closing. xi. Certificate. The execution and delivery by MDSI of a certificate as to compliance with clauses (ix) and (x) above. d. Best efforts. Each of the Parties shall use best efforts to satisfy the applicable conditions precedent described in this Section 6. 7 8 7. Insurance. Digicon agrees to continue in effect the insurance coverage with respect to the Subsidiaries until the Closing, provided that the cost of such insurance coverage shall be borne by DG Seis, and provided further that Digicon's obligation to provide insurance coverage under this Section 7 shall in any event expire on September 30, 1995. 8. Confidentiality. a. Non-Disclosure. The Parties agree that the subject matter of this Agreement (the "Confidential Information") is non-public, confidential, and sensitive in nature. Therefore, each of the Parties agrees that it shall not copy, reproduce, distribute or disclose to any third party any of the Confidential Information, or any facts related thereto, in any manner whatsoever, except with the written consent of the other Party; provided, however, that MDSI and its affiliates shall be allowed to disclose to WAII (and its directors, officers, employees, representatives, agents and consultants) such aspects of the Confidential Information as it deems appropriate in connection with negotiations therewith relating to the Business Venture Agreement and the transactions contemplated therein; and provided, further, that Digicon may make such disclosures as Digicon and its counsel shall deem appropriate to comply with Digicon's obligations under applicable securities laws and other applicable laws. b. Certain Limitations on Scope of Confidential Information. Confidential Information shall not include information which has come within the public domain through no fault or action by the Party disclosing the Confidential Information. 9. Digicon Acknowledgement of Foregoing Business Opportunity. Digicon acknowledges that by entering into this Agreement and the transactions contemplated hereby, it is foregoing significant business opportunities in the countries of the former Soviet Union which may be beneficial to its interest. Accordingly, Digicon hereby waives any and all right to bring any action, claim, suit or other proceeding (whether legal, equitable or otherwise) against MDSI or its affiliates, Newco, WAII or any other Person where such is related to or in connection with such foregone business opportunities which may arise as a result of the transactions contemplated by this Agreement. 10. No Further Digicon Interest in Newco or Subsidiaries. Digicon understands, acknowledges and agrees that it shall no longer have any interest whatsoever in any of the Subsidiaries or Caspian Geophysical upon the consummation of the transactions contemplated in this Agreement. Accordingly, Digicon hereby agrees that neither its consent nor its approval (whether written, oral or otherwise) shall be required in connection with any act involving or relating to any of the Subsidiaries or Caspian Geophysical upon or after the Closing. 8 9 11. Indemnification. a. MDSI's Agreement to Indemnify. MDSI agrees to indemnify, defend and hold harmless Digicon, its officers, directors, employees, subsidiaries and affiliates (the "Digicon Indemnified Parties"), at any time after consummation of the Closing, from and against all loss, damage, cost, expense (including reasonable attorneys' fees), claim or demand asserted against, resulting to, imposed upon or incurred by the Digicon Indemnified Parties or any member thereof, directly or indirectly, by reason of or resulting from (i) liabilities, obligations or claims relating to the Interest transferred hereunder and the operation of the Subsidiaries (whether absolute, accrued, contingent or otherwise) whether arising out of facts, conditions or circumstances occurring before or after Closing, (ii) a breach of any representation, warranty or agreement of MDSI contained in or made pursuant to this Agreement or any facts or circumstances constituting such a breach, (iii) any claim or liability for brokerage commissions or finder's fees incurred by reason of any action taken by MDSI, and (iv) the First Obligation and the Second Obligation. b. Digicon's Agreement to Indemnify. Digicon agrees to indemnify, defend and hold harmless MDSI, its officers, directors, employees, subsidiaries and affiliates (including but not limited to the Subsidiaries and Newco, the "MD Seis Indemnified Parties"), at any time after consummation of the Closing, from and against all loss, damage, cost, expense (including reasonable attorneys' fees) claim or demand asserted against, resulting to, imposed upon or incurred by the MD Seis Indemnified Parties or any member thereof, directly or indirectly, by reason of or resulting from (i) a breach of any representation, warranty or agreement of Digicon contained in or made pursuant to this Agreement or any facts or circumstances constituting such a breach, and (ii) any claim or liability for brokerage commissions or finder's fees incurred by reason of any action taken by Digicon. 12. Miscellaneous a. Survival of Representations and Warranties. All representations, warranties and agreement made by the Parties to this Agreement shall survive the Closing notwithstanding any investigation at any time made by or on behalf of any Party hereto. b. Parties in Interest. This Agreement will be binding upon, inure to the benefit of, and be enforceable by, the Parties hereto and their respective successors and assigns. c. Amendments. This Agreement may not be amended except by an instrument in writing signed by each of the Parties. d. Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9 10 e. Counterparts and Execution via Facsimile. This Agreement may be executed and delivered in counterparts, each of which shall be considered one and the same agreement, it being understood that the same counterpart need not be signed by all Parties hereto. This Agreement may also be executed and delivered by exchange of facsimile transmissions of originally executed copies, provided that an originally executed copy is promptly delivered to the other Party. The Parties acknowledge and agree that this Agreement has been executed by MDSI, and the Closing shall occur, outside of the United States of America, its territories and possessions. f. Entire Agreement. This Agreement (including the documents, instruments, schedules and exhibits referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof and (ii) is not intended to confer upon any Person other than the Parties any rights or remedies hereunder. g. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE RULES OR PRINCIPLES OF CONFLICTS OF LAWS (RULES OF PRIVATE INTERNATIONAL LAW) THEREOF. h. Dispute Resolution and Arbitration. i. Rules Governing Disputes. The Parties shall seek to resolve all disputes arising from or related to this Agreement amicably. In the event the Parties cannot resolve such disputes, either Digicon or MDSI may request arbitration of any dispute arising from or related to this Agreement, by delivery or written notice to the other Parties. Such disputes shall be submitted to final and binding arbitration before a Board of Arbitration in accordance with the International Arbitration Rules of the American Arbitration Association. ii. Board of Arbitration. The Board of Arbitration shall consist of three (3) arbitrators. MDSI shall appoint one arbitrator and Digicon shall appoint one arbitrator. The two (2) arbitrators thus appointed shall appoint the third (3rd) arbitrator. If a Party fails to appoint its arbitrator within thirty (30) days of the receipt of written request from a Party for Arbitration, such arbitrator shall be appointed by the President of the American Arbitration Association. If the two arbitrators thus appointed fail to agree on the appointment of the third arbitrator within thirty (30) days of the appointment of the other arbitrators and if the Parties do not otherwise agree on the appointment of the third arbitrator, the President of the American Arbitration Association shall appoint the third arbitrator. The third arbitrator shall be the presiding arbitrator on the Board of Arbitration. iii. Procedures for Arbitration. The arbitration shall be conducted in the English language and shall take place under the auspices of and in the offices of the American Arbitration Association in Houston, Texas. The Board of Arbitration shall decide by majority vote on points of substance, law and otherwise; provided, however, that in the event a majority vote cannot be reached, the third arbitrator shall make the final decision. All decisions of the Board of Arbitration shall be 10 11 rendered in the English language and shall be final and binding on the parties and may be entered against them in court of competent jurisdiction. The Board of Arbitration shall determine the costs of arbitration. The Board of Arbitration shall determine the costs of arbitration in its award, and such costs shall be allocated between the Parties as determined by the Board of Arbitration. iv. No Suspension of Obligations. Neither the existence of any dispute, controversy or claim nor the fact that arbitration is pending shall relieve any of the Parties of its obligations under this agreement except for obligations related to matters in dispute and under pending arbitration. v. Consent to Jurisdiction. Each of the Parties agree that any judgment rendered by the Board of Arbitration against it may be executed against its assets in any jurisdiction. By execution of this Agreement, each of the Parties hereby irrevocably submits to the non-exclusive jurisdiction of the appropriate courts in the USA in any legal action or proceeding relating to such execution of judgment. The Parties hereby irrevocably waive any objection they may have to any suit, action or proceeding arising out of or relating to the enforcement of an arbitral judgment under this Agreement, whether brought in the USA or in any other jurisdiction in which it has assets, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such jurisdiction has been brought in an inconvenience forum. SIGNATURE PAGE FOLLOWS 11 12 IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly authorized officers on the date first set forth above. DIGICON INC. By: -------------------------- Name: Title: MD SEIS INTERNATIONAL LIMITED By: -------------------------- Name: Title: 12 EX-11 3 COMPUTATION OF INCOME (LOSS) PER COMMON SHARES 1 EXHIBIT 11 COMPUTATION OF INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (a) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended April 30, April 30, --------------------- -------------------- 1995 1994 1995 1994 ------ ------ ------ ------ PRIMARY INCOME (LOSS) PER SHARE: Weighted average shares of common stock outstanding 11,135 9,768 11,075 9,540 ======= ======== ======= ======== Primary income (loss) per share $ .04 $ (1.40) $ .17 $ (1.46) ======= ======== ======= ======== FULLY DILUTED INCOME (LOSS) PER SHARE: Weighted average shares of common stock outstanding 11,135 9,768 11,075 9,540 Shares issuable from assumed conversion of stock options and warrants (treasury stock method) ------- -------- ------- -------- Weighted average shares of common stock outstanding, as adjusted 11,135 9,768 11,075 9,540 ======= ======== ======= ======== Fully diluted income (loss) per share (b) $ .04 $ (1.40) $ .17 $ (1.46) ======= ======== ======= ======== NET INCOME (LOSS) FOR PRIMARY AND FULLY DILUTED COMPUTATION: Net income (loss) $ 479 $(13,688) $ 1,915 $(13,953) ======= ======== ======= ========
- ---------- (a) Weighted average shares of common stock for all periods presented have been restated to reflect the effect of a one for three reverse stock split consummated on January 17, 1995. (b) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although stock options and warrants had no dilutive effect. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DIGICON INC'S FORM 10-Q FOR THE 9-MONTH PERIOD ENDED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q 1,000 9-MOS JUL-31-1995 AUG-01-1994 APR-30-1995 2,903 0 38,683 568 1,646 50,990 107,007 62,894 138,605 46,366 23,929 111 0 0 62,680 138,605 0 96,714 0 93,725 0 0 3,844 2,989 1,074 1,915 0 0 0 1,915 .17 .17
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