-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UNwpLcZMQ/9w0RUj0Vhp0OcDG/pOeFQYlaYSJ2zGZQfHgAHZIfWSu8a5GkbRrhhJ kpyQORrTOAePx4pfhpIIxg== 0000950129-96-001220.txt : 19960617 0000950129-96-001220.hdr.sgml : 19960617 ACCESSION NUMBER: 0000950129-96-001220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960614 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: 000-04160 FILM NUMBER: 96581051 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. - DATED 04/30/96 1 ================================================================================ 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, 1996 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) (713) 526-5611 (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 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 12, 1996 Common Stock, $.01 par value 11,177,422 ================================================================================ 2 DIGICON INC. AND SUBSIDIARIES INDEX
Page Number ----------- PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - April 30, 1996 and July 31, 1995 1 Consolidated Statements of Operations - For the Three and Nine Months Ended April 30, 1996 and 1995 3 Consolidated Statements of Cash Flows - For the Nine Months Ended April 30, 1996 and 1995 4 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGICON INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) April 30, July 31, 1996 1995 -------------- ------------- (In thousands of dollars) ASSETS Current assets: Cash $ 5,303 $ 4,209 Restricted cash investments 339 670 Accounts and notes receivable (net of allowance for doubtful accounts: April, $527; July, $703) 37,962 40,662 Materials and supplies inventory (net of reserves: April, $66; July, $66) 1,466 1,335 Prepayments and other 8,093 6,619 ------------ ----------- Total current assets 53,163 53,495 Property and equipment: Seismic equipment 58,424 53,615 Data processing equipment 23,189 26,703 Leasehold improvements and other 28,081 29,394 ------------ ----------- Total 109,694 109,712 Less accumulated depreciation 60,160 60,874 ------------ ----------- Property and equipment - net 49,534 48,838 Proprietary seismic data 25,725 28,444 Goodwill (net of accumulated amortization: April, $1,483; July, $1,168) 2,762 3,077 Other assets 1,212 1,216 ------------ ----------- Total $ 132,396 $ 135,070 ============ ===========
- -------------------- See Notes to Consolidated Financial Statements. 1 4
(Unaudited) April 30, July 31, 1996 1995 --------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands of dollars) Current liabilities: Current maturities of long-term debt $ 20,005 $ 10,915 Accounts payable - trade 16,454 18,875 Accrued interest 342 409 Other accrued liabilities 13,526 14,869 Income taxes payable 1,494 1,097 ------------- ----------- Total current liabilities 51,821 46,165 Non-current liabilities: Long-term debt-less current maturities 9,161 25,243 Deferred credits 3,669 3,675 Other non-current liabilities 1,228 1,105 ------------- ----------- Total non-current liabilities 14,058 30,023 Stockholders' equity: Common stock, $.01 par value; authorized: 20,000,000 shares; issued: 11,123,422 shares and 11,134,939 shares at April and July, respectively 111 111 Additional paid-in capital 71,065 71,895 Accumulated deficit from August 1, 1991 (4,659) (8,352) Less: Treasury stock, at cost; 858,497 shares (4,772) ------------- ----------- Total stockholders' equity 66,517 58,882 ------------- ----------- Total $ 132,396 $ 135,070 ============= ===========
- -------------------- See Notes to Consolidated Financial Statements. 2 5 DIGICON INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share amounts)
Three Months Ended Nine Months Ended April 30, April 30, --------------------------- ---------------------------- 1996 1995 1996 1995 ---------- ---------- ---------- ----------- Revenues $ 36,279 $ 34,448 $ 114,525 $ 96,714 Costs and expenses: Operating expenses 27,837 27,767 91,517 75,476 Depreciation and amortization 4,015 3,469 11,537 10,315 Selling, general and administrative 1,431 1,244 3,958 3,408 Interest 1,052 1,343 3,677 3,844 Equity in loss of 50% or less- owned companies and joint ventures 12 185 17 825 Other - net (97) (69) (34) (143) ---------- --------- ---------- ----------- Total costs and expenses 34,250 33,939 110,672 93,725 ---------- --------- ---------- ----------- Income before provision for income taxes 2,029 509 3,853 2,989 Provision for income taxes 165 30 160 1,074 ---------- --------- ---------- ----------- Net income $ 1,864 $ 479 $ 3,693 $ 1,915 ========== ========= ========== =========== Per share of common stock: Income per share of common stock $ .17 $ .04 $ .34 $ .17 ========== ========= ========== =========== Weighted average shares (includes common stock only) 11,123 11,135 10,939 11,075 ========== ========= ========== =========== 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, ---------------------------- 1996 1995 ------------ ------------ (In thousands of dollars) Operating activities: Net income $ 3,693 $ 1,915 Non-cash items included in net income: Depreciation and amortization 11,537 10,315 Amortization of deferred gain on sale/leaseback (103) (753) (Gain) loss on disposition of property and equipment 158 (70) Equity in loss of 50% or less-owned companies and joint ventures 17 825 Write-down of proprietary seismic data to market 297 297 Restructuring accrual (786) Amortization of warrants issued with short-term related party loans 77 Change in operating assets/liabilities: Accounts and notes receivable 1,834 (5,079) Accounts and notes receivable from FSU joint venture 59 Materials and supplies inventory (131) 139 Prepayments and other (1,474) (1,979) Proprietary seismic data 2,422 (7,994) Other 13 407 Accounts payable - trade (2,653) (2,944) Accrued interest (67) 270 Other accrued liabilities (1,240) 1,929 Income taxes payable 397 (352) Deferred credits (6) (415) Other non-current liabilities 123 52 ----------- --------- Total cash provided (used) in operating activities 14,817 (4,087) Financing activities: Borrowings of short-term related party debt 30 Payments of short-term related party debt (1,052) Payments of long-term debt (8,082) (4,000) Net borrowings (payments) under credit agreements (4,439) 3,430 Common stock issue costs (30) (72) Net proceeds from sale of treasury stock 3,972 ----------- --------- Total cash used by financing activities (8,579) (1,664)
- -------------------- See Notes to Consolidated Financial Statements. 4 7 DIGICON INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) UNAUDITED
Nine Months Ended April 30, ----------------------------- 1996 1995 ------------ ------------ (In thousands of dollars) Investing activities: Purchase of property and equipment $ (5,952) $ (2,618) Sale of property and equipment 514 1,207 (Increase) decrease in restricted cash investments 331 (340) Increase in investment in FSU joint ventures (1,673) Sale to Syntron, Inc.: Inventories and technologies 1,630 Property and equipment 1,370 ------------- ---------- Total cash used by investing activities (5,107) (424) Currency (gain) loss on foreign cash (37) 53 ------------- ---------- Change in cash and cash equivalents 1,094 (6,122) Beginning cash and cash equivalents balance 4,209 8,365 ------------- ---------- Ending cash and cash equivalents balance $ 5,303 $ 2,243 ============= ==========
- -------------------- 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, -------------------------------- 1996 1995 ------------- ------------ (In thousands of dollars) Schedule of non-cash investing and financing activities: Increase in property and equipment for: Accounts and notes receivable - deferred credits utilized $ 866 Equipment purchase obligations 5,529 $ 4,894 Accounts payable - trade 232 133 Increase (decrease) in investment in FSU joint venture for: Common stock 2,309 Accounts and note receivable from FSU joint venture (409) Long-term debt 245 Sale of inventories, property and equipment, and technologies to Syntron, Inc. resulting in an increase (decrease) in: Accounts and notes receivable - deferred credits 3,255 Materials and supplies inventory (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 resulting in a decrease in: Accounts and notes receivable (78) Property and equipment - net (247) Long-term debt (199) Accounts payable - trade (18) Other non-current liabilities (108) Warrants issued with short-term related party loans (89) Supplemental disclosures of cash flow information: Cash paid for: Interest- Revolving credit agreements 1,408 1,449 Secured term loan 363 473 Equipment purchase obligations 1,304 766 Other 620 747 Income taxes 634 1,431
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, 1996, and the results of its operations and its cash flows for the three and nine months ended April 30, 1996 and 1995. 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. EARNINGS PER SHARE Weighted average shares and earnings per share for all periods presented have been restated to reflect the effect of a one for three reverse stock split consummated on January 17, 1995. Primary earnings per share is computed based on the weighted average number of shares of common stock plus common stock equivalents. Shares issuable upon the conversion of stock options and warrants, which are common stock equivalents, were disregarded since the treasury stock method of calculation produced no incremental shares or resulted in dilution of less than 3%. Fully diluted earnings per share is not presented since common stock equivalents referenced above had no dilutive effect or resulted in dilution of less than 3%. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements with fiscal years beginning after December 15, 1995. The Company will be required to implement this statement for the fiscal year 1997. Implementation of this pronouncement is not expected to have a material effect on the Company's consolidated financial statements. 7 10 In March 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based Compensation." This statement established a fair value method of accounting for stock-based compensation plans either through recognition or disclosure. This statement is effective for fiscal years beginning after December 15, 1995. The Company will be required to implement this statement for the fiscal year 1997. The Company intends to adopt this standard by disclosing the pro forma net income (loss) and net income (loss) per share amounts assuming the fair value method was adopted on August 1, 1995. The adoption of this statement will have no material impact on the Company's consolidated financial statements. 2. LONG-TERM DEBT The Company's long-term debt is as follows:
April 30, July 31, 1996 1995 --------------- --------------- (In thousands of dollars) Revolving credit agreement due April 1997, at prime plus 3% ( 11.25% at April 30, 1996) $ 10,566 $ 14,123 Secured term loan due June 1997, at 10.75% 4,500 4,500 Secured Indonesian Rupiah revolving credit agreement due September 1995, at 19% 894 Equipment purchase obligations maturing through February 1999, at an average rate of 11.05% at April 30, 1996 14,100 16,641 ------------- -------------- Total 29,166 36,158 Less current maturities 20,005 10,915 ------------- -------------- Due after one year $ 9,161 $ 25,243 ============= ==============
The revolving credit agreement is with a finance company and provides a revolving credit facility of up to $17,000,000 (increased from $15,000,000 in April 1995) through April 11, 1997. Advances under the agreement are limited by a borrowing formula and are collateralized 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 dividends and requires the Company to maintain certain financial ratios. 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. At June 10, 1996, approximately $6,600,000 was available for borrowing under this agreement. The facility matures on April 11, 1997, and as a result, the outstanding balance at April 30, 1996 ($10.6 million) is classified as current. During May 1996 the lender formally offered to ex- 8 11 tend the facility until approximately June 15, 1998 upon terms which would result in a reduction of the Company's effective borrowing costs. The Company is evaluating this offer but no decision has yet been made with regard to this facility. The secured term loan is due June 30, 1997, with interest at 10.75% payable quarterly. A principal payment of $1,500,000 is due June 30, 1996, and the remaining unpaid principal is due June 30, 1997. The loan 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. 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 loan, the Company issued common stock purchase warrants to the lender. The secured Indonesian Rupiah revolving credit facility in the amount of two billion Rupiahs was the obligation of P.T. Digicon Mega Pratama, a consolidated subsidiary of the Company, and provided working capital and certain bank guarantees for its Indonesian operations. The facility was repaid September 1995. The Company's equipment purchase obligations represent installment loans and capitalized lease obligations primarily related to computing and seismic equipment. 3. SALE OF TREASURY STOCK In September 1995, the Company sold its 858,497 shares of treasury stock to a group of institutional investors at a price of $4.6875 per share for total cash proceeds of $4,024,204. 4. OTHER COSTS AND EXPENSES Other costs and expenses consist of the following:
Three Months Ended Nine Months Ended April 30, April 30, --------------------- ----------------------- 1996 1995 1996 1995 --------- ---------- ---------- ----------- (In thousands of dollars) Net foreign currency exchange (gain) loss $ (175) $ (31) $ (120) $ 60 Net (gain) loss on disposition of property and equipment 106 17 158 (70) Interest income (28) (48) (72) (133) Other (7) ------ ------ ------ ------ Total $ (97) $ (69) $ (34) $ (143) ====== ====== ====== ======
9 12 5. COMMON STOCK AND WARRANTS In January 1996, the Company cancelled 11,517 shares of common stock and 22,473 warrants previously held by an escrow agent for issuance in conjunction with the cancellation in 1991 of a previous issue of common and preferred stock and certain other liabilities. On March 18, 1996, the board of directors declared a dividend distribution to common shareholders of record on April 1, 1996, of one right that entitles a stockholder to purchase a fraction of a share of a class of preferred stock upon the occurrence of specified events enumerated by the rights agreement. Such preferred stock, although not issued at April 30, 1996 could, depending on the terms of such stock, provide for a liquidation preference over the Company's common stock. The rights, among other things, will cause substantial dilution to a person or group that attempts to acquire the Company. The Company has agreed to give notice of the redemption of the rights prior to consummation of the transaction described in Note 6 which will result in termination of the rights agreement. 6. SUBSEQUENT EVENTS On May 10, 1996 the Company entered into a Combination Agreement (the "Agreement") with Veritas Energy Services Inc. ("Veritas"), a Canadian company. The terms of the Agreement provide that Veritas will be combined with and into the Company (the "Combination"). As a result of the Combination, each share of Veritas no par value common shares outstanding will be converted into the right to receive Veritas no par value exchangeable stock (the "Exchangeable Stock") at an exchange ratio of 0.8 of a share of Exchangeable Stock per Veritas common share. All of the holders of Veritas common shares, except for those stockholders (required to be 5% or less of the outstanding Veritas common shares by the terms of the Agreement) who perfect and properly exercise their right to dissent from the Combination and receive fair value of their shares in cash, will become holders of Exchangeable Stock. It is estimated that a minimum of approximately 7 million shares of Exchangeable Stock will be issued. The aggregate stated capital of the Exchangeable Stock will be equal to the aggregate stated capital of the Veritas common shares immediately prior to the Combination that are exchanged or approximately $29.5 million. The Exchangeable Stock will be convertible, at the discretion of the stockholder, on a one-for-one basis into shares of the Company's $0.01 par value common stock and their holders will have rights identical to the holders of the Company's common stock. Options to purchase shares of Veritas Common Stock ("Veritas Option") will be converted into options to purchase shares of the Company's common stock at an exchange ratio of 0.8 of an option in the Company's common stock per Veritas Option. The Veritas articles of amalgamation will be amended to reduce the number of authorized Veritas common shares to one which will be held by the Company. Consummation of the proposed Combination awaits approval of the Company's and Veritas' shareholders and United States ("U.S.") and Canadian regulatory authorities. 10 13 The Combination is to be accounted for as a pooling of interests, and accordingly, the financial position and results of operations of the Company and Veritas will be combined in fiscal 1996 retroactive to August 1, 1995 and Veritas' fiscal year will be conformed to the Company's fiscal year. In addition, all prior periods presented will be restated to give effect to the Combination. Accordingly, Veritas' operating results for the period August 1, 1995 to October 31, 1995 will be included in the Company's fiscal 1995 and 1996 financial statements and will be reflected as an adjustment to the combined Company's retained earnings on August 1, 1995. Presented below is pro forma statement of operations information assuming the Combination had occurred on August 1, 1993. Amounts related to Veritas have been converted into the Company's reporting currency, U.S. dollars, using weighted average exchange rates and have been adjusted for differences between U.S. and Canadian generally accepted accounting principles ("GAAP"). GAAP adjustments include adjustments to (i) write off foreign exchange gains and (losses) on borrowings which are deferred and amortized over the period of the debt affecting net income by approximately ($220,000), $253,000 and ($25,000) for the years ended July 31, 1993, 1994 and 1995, respectively and (ii) reverse the effect of prior period adjustments affecting net income by approximately ($834,000) and $314,000 for the years ended July 31, 1994 and 1995, respectively. All amounts are presented in thousands except per share amounts.
Nine Months Ended Years Ended July 31, April 30, ------------------------------------ ------------------------ 1993 1994 1995 1995 1996 ---------- ---------- --------- ---------- --------- Revenues $ 156,876 $ 180,835 $ 217,072 $ 157,687 $ 183,994 ========= ========= ========= ========= ========= Net income (loss) $ 574 $ (10,354) $ 5,594 $ 5,358 $ 5,782 ========= ========= ========= ========= ========= Earnings (loss) per share $ .05 $ (.66) $ .31 $ .30 $ .33 ========= ========= ========= ========= =========
There are no anticipated changes in accounting methods for either the Company or Veritas as a result of the combination whose effects should be considered in the supplemental information presented above. 11 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Digicon's internal sources of liquidity are cash balances ($5.3 million at April 30, 1996) and cash flow from operations ($14.8 million for the nine months ended April 30, 1996). External sources include the unutilized portion of the working capital facility described below (approximately $6.6 million at June 10, 1996), equipment financing and trade credit. To provide additional working capital, Digicon maintains a $17.0 million revolving credit facility with a commercial finance company which provides for borrowings of up to 80% of the majority of Digicon's domestic and foreign receivables at an interest rate of 3% over the prime rate, secured by most of Digicon's world-wide assets. In connection with such facility, Digicon is limited, without the consent of the lender, in taking certain actions, including creating indebtedness, is prohibited from paying dividends and is required, among other provisions, to maintain certain financial ratios. The facility matures on April 11, 1997, and as a result, the outstanding balance at April 30, 1996 ($10.6 million) is classified as current. The lender has formally offered to extend the facility until approximately June 15, 1998 upon terms which would result in a reduction in Digicon's effective borrowing costs. Digicon is evaluating the offer but no decision has yet been made with regard to the facility. At April 30, 1996, Digicon's backlog of commitments for services totaled $107.4 million of which 32% relates to land acquisition, 44% relates to marine acquisition and 24% relates to data processing. Digicon expects to complete 100% of these commitments during the next twelve months. Digicon requires significant amounts of working capital to support its operations and to fund its capital spending and research and development programs. Digicon's foreign operations, which accounted for 54% of fiscal 1995 revenues and 59% of revenues for the nine months ended April 30, 1996, 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, Digicon 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. During the first half of the past two fiscal years, this problem was exacerbated as, for budgeting purposes, several clients deferred payments on data library purchases until January 1995 and 1996, respectively, at which time substantially all of such receivables were collected. Depending on the timing of future sales of the data and the collection of the proceeds from such sales, Digicon's liquidity will continue to be affected; however, Digicon believes that these non-exclusive surveys have good long-term sales, earnings and cash flow potential. 12 15 In recent years, Digicon has updated and increased its data processing capabilities, invested significant capital to outfit a new seismic vessel and has, more recently, allocated significant resources to its land and transition zone activities. In the past 3 1/2 years, Digicon has committed approximately $82.5 million for new capital equipment and invested approximately $13.8 million in its research and development efforts. During fiscal 1996, Digicon expects to spend approximately $20 million for capital expenditures and $2.7 million for research and development activities. In addition, $6.2 million of equipment was purchased by a commercial finance company and leased to Digicon under an operating lease entered into in December 1995. The majority of capital spending in 1996 will be to upgrade and expand Digicon's land and marine data acquisition capabilities. The utilization of net operating loss carryforwards ("NOLs") is subject to certain limitations. Additionally, when such NOLs are utilized, the benefit will be recognized as an addition to paid-in capital and will not be reflected in the consolidated statements of operations. Digicon believes that it possesses sufficient liquidity to continue operations on a satisfactory basis. If additional working capital were to become necessary as a result of deterioration in demand for or pricing of Digicon's services, and if additional financing were not available, Digicon's operating results and financial condition could be adversely affected. On May 10, 1996, the Company entered into a combination agreement with Veritas Energy Services, Inc., a Canadian company, that provides for Veritas to be combined with and into the Company. The combination will be accounted for as a pooling of interests. See Note 6 to Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Three Months Ended April 30, 1996 compared with Three Months Ended April 30, 1995 Revenues. Revenues for the current quarter increased $1.8 million or 5% over the prior year quarter. Land revenues increased 14% from $10.0 million to $11.4 million primarily as a result of performing higher revenue producing 3D surveys in the current year compared to 2D surveys in the prior year in North America. These increases were partially offset by lower revenues for a North American crew that was being converted to an Input/Output System Two-RSR system and the decreased utilization of the South American land crews that performed a single large contract during the third quarter of the prior year but operated on numerous smaller contracts during the current year. Marine revenues increased significantly from $6.6 million to $12.2 million, as the Company added a new vessel to the Gulf of Mexico region. In addition, utilization increased since in the prior year, several Gulf of Mexico vessels were shooting infill and undershooting obstructions. Also during the current year, each of the Company's vessels generally were acquiring more contract data and performing higher funded multi-client surveys than in the prior year. These revenues were partially offset while two vessels were in dry-dock for equipment up- 13 16 grades and biennial maintenance and inspection and due to depressed prices in the Far East. Processing revenues were comparable to prior year's revenues. Revenues from increased capacity in Singapore, increased activity levels in the Far East and a new contract at the Assen, Holland center were offset by a reduction in revenues from centers closed in Malaysia, Colombia and Oklahoma City and continued depressed prices in Europe. Revenues in the U.S. were down since most processing in the current quarter was dedicated to partially funded multi-client surveys. Sales from proprietary data of $3.4 million were lower than prior year's revenues of $8.4 million. Significant sales for the current year occurred in the second quarter. Operating Expenses. Cost of services were comparable for both periods but, as a percentage of total revenues, cost of services decreased from 81% to 77%. The decrease as a percentage of total revenues resulted mainly from higher margins on 3D land acquisition surveys and higher margins on data processing services as a result of increased capacity in Singapore and Houston and an improvement in the Far East market. Depreciation and Amortization. Depreciation and amortization expense increased 16% from $3.5 million to $4.0 million, due to equipment purchases for South American land crews, three of the Company's vessels and the Houston, Singapore and London data processing centers. Selling, General and Administrative. Selling, general and administrative expenses increased 15% from $1.2 million to $1.4 million, resulting primarily from additional costs incurred in implementing a new administrative data processing system. Interest. Interest expense decreased 22% from $1.3 million to $1.1 million primarily from reduced borrowings under Digicon's revolving credit agreement. Equity in Loss. The joint ventures in the former Soviet Union (the "FSU") were sold in June 1995, therefore equity losses declined from $185,000 to $12,000. Other. Other income increased from $69,000 to $97,000 resulting primarily from increased net foreign currency exchange gains partially offset by increases in net losses on disposition of property and equipment. Income Taxes. Provision for income taxes increased from $30,000 to $165,000 primarily due to an increase in taxable income in South America. 14 17 Nine Months Ended April 30, 1996 compared with Nine Months Ended April 30, 1995 Revenues. For the nine month period ended April 30, 1996, total revenues increased 18% from $96.7 million to $114.5 million. Land revenues increased 14% from $28.5 million to $32.5 million, as revenues from North American and Argentine operations improved as a result of increases in both operating rates and production on 3D and transition zone surveys. Current period revenues were reduced by downtime associated with the conversion of a domestic crew to an Input/Output System Two - RSR system, and permitting delays for another crew. Marine revenues increased 34% from $24.9 million to $33.5 million, primarily resulting from the addition of a new vessel, the reassignment of two vessels to contract work and higher funding levels on proprietary surveys. This increase was partially offset by lower prices in the Far East. Data processing revenues increased 4% from $26.9 million to $28.0 million, due to improved contract terms at the Assen, Holland center, increased capacity at the Houston and Singapore centers and the improved Australian market. These increases were partially offset by the closing of Digicon's Bogota, Colombia and Oklahoma City centers and depressed European data processing prices. Proprietary seismic data revenues increased 29% from $16.0 million to $20.5 million, resulting from an expansion of Digicon's library. This expansion has been in response to modifications in oil and gas companies' spending strategies. Operating Expenses. Cost of services for the period increased 21% from $75.5 million to $91.5 million, and, as a percentage of total revenues, cost of services increased from 78% to 80%. The increase as a percentage of total revenues resulted from a weakness in marine acquisition margins primarily in the Far East, lower profitability on the mix of proprietary data sales and $929,000 in Argentina social security taxes retroactively applied to compensation of employees converted from a temporary to permanent employment classification. Depreciation and Amortization. Depreciation and amortization expense increased 12% from $10.3 million to $11.5 million, due to equipment purchases for South American land crews, three of Digicon's vessels and the Houston, Singapore and London data processing centers. Selling, General and Administrative. Selling, general and administrative expenses increased 16% from $3.4 million to $4.0 million, resulting primarily from additional costs incurred in implementing a new administrative data processing system. Interest. Interest expense decreased 4% from $3.8 million to $3.7 million, resulting primarily from reduced borrowings under Digicon's revolving credit agreement. Equity in Loss. The FSU joint ventures were sold in June 1995, therefore equity losses declined from $825,000 to $17,000. Other. Other income decreased from $143,000 to $34,000. The current period includes losses on damaged cables offset by net foreign currency gains and the prior period includes a gain on the sale of a seismic vessel partially offset by losses on damaged cables and net foreign currency losses. 15 18 Income Taxes. Provisions for income taxes decreased from $1.1 million to $160,000. In the current period, provision for income taxes from taxable income primarily in Malaysia was largely offset by an $876,000 tax benefit resulting from taxable losses in South America generated by deduction for the Argentina social security taxes and compensation previously discussed. Provision for income taxes in the prior period related primarily to taxable income in Malaysia and South America and a tax assessment in Jakarta. 16 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings As of June 12, 1996, 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: 11) Computation of income per common and common equivalent share for the three and nine months ended April 30, 1996 and 1995. b) Reports on Form 8-K 1) A Form 8-K dated March 18, 1996 reported the declaration of a dividend distribution of one right for each outstanding share of common stock of the Company to shareholders of record at the close of business on April 1, 1996. Each right entitles the registered holder to purchase from the Company a fraction of a share of Preferred Stock - Junior Participating Series A, par value $.0l per share upon the occurrence of specified events enumerated by a Rights Agreement. 2) A Form 8-K dated May 10, 1996 reported the signing of a Combination Agreement related to the proposed merger of Digicon Inc. and Veritas Energy Services Inc. 17 20 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 13, 1996 By: Stephen J. Ludlow ---------------------------------------- Stephen J. Ludlow (President and Chief Executive Officer) Date: June 13, 1996 By: Richard W. McNairy ---------------------------------------- Richard W. McNairy (Principal Financial Officer) 18 21 EXHIBIT INDEX 11) Computation of income per common and common equivalent share for the three and nine months ended April 30, 1996 and 1995. 27) Financial Data Schedule EX-11 2 COMPUTATION OF INCOME PER COMMON & EQUIV. SHARE 1 EXHIBIT 11 COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts)
Three Months Ended Nine Months Ended April 30, April 30, -------------------- ---------------------- 1996 1995 1996 1995 ------- ------- ------- -------- PRIMARY INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 11,123 11,135 10,939 11,075 ======= ======= ======= ======== Primary income per share $ .17 $ .04 $ .34 $ .17 ======= ======= ======= ======== FULLY DILUTED INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 11,123 11,135 10,939 11,075 Shares issuable from assumed conversion of: Warrants 154 154 Stock options 81 80 ------- ------- ------- -------- Weighted average shares of common stock outstanding, as adjusted 11,358 11,135 11,173 11,075 ======= ======= ======= ======== Fully diluted income per share $ .16 (3) $ .04 (2) $ .33 (3) $ .17 (2) ======= ======= ======= ======== NET INCOME FOR PRIMARY AND FULLY DILUTED COMPUTATION: Net income $ 1,864 $ 479 $ 3,693 $ 1,915 ======= ======= ======= ========
- -------------------- (1) Weighted average shares of common stock outstanding for all periods have been restated for a one for three reverse stock split consummated on January 17, 1995. (2) This calculation is submitted in accordance with Item 601(b)11 of Regulation S-K although warrants and stock options had no dilutive effect. (3) This calculation is submitted in accordance with Item 601(b)11 of Regulation S-K although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because warrants and options result in dilution of less than 3%. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGICON INC'S FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 9-MOS JUL-31-1996 AUG-01-1995 APR-30-1996 5,642 0 37,962 527 1,466 53,163 109,694 60,160 132,396 51,821 9,161 111 0 0 66,406 132,396 0 114,525 0 110,672 0 0 3,677 3,853 160 3,693 0 0 0 3,693 .34 .34
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