-----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, No5Ih3UOcyb+730bRnmb5CBn8NHbJccVp1tG1IXJ0WtA8q2EXtjYewLvXMw41dPl zCKLaS36AibggK7XiZ28fQ== 0000950129-96-003353.txt : 19961217 0000950129-96-003353.hdr.sgml : 19961217 ACCESSION NUMBER: 0000950129-96-003353 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19961216 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERITAS DGC 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: 96680827 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 FORMER COMPANY: FORMER CONFORMED NAME: DIGICON INC DATE OF NAME CHANGE: 19920703 10-Q 1 VERITAS DGC, INC. - DATED 10/31/96 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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 Veritas DGC 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) 512-8300 (Registrant's telephone number, including area code) NO CHANGES (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the Company's common stock, $.01 par value (the "Common Stock"), outstanding at November 30, 1996 was 18,446,568 (including 3,495,630 Veritas Energy Services Inc. exchangeable shares which are identical to the Common Stock in all material respects). ================================================================================ 2 VERITAS DGC INC. AND SUBSIDIARIES INDEX
Page Number ------ PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - July 31, 1996 and October 31, 1996 1 Consolidated Statements of Operations - For the Three Months Ended October 31, 1995 and 1996 3 Consolidated Statements of Cash Flows - For the Three Months Ended October 31, 1995 and 1996 4 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19
3 - ------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars)
(Unaudited) July 31, October 31, 1996 1996 ------------ ------------ ASSETS (AS COMBINED - SEE NOTE 2) Current assets: Cash and short-term investments $ 10,072 $ 32,737 Restricted cash investments 327 530 Accounts and notes receivable (net of allowance for doubtful accounts: July, $740; October, $383) 65,447 80,468 Materials and supplies inventory 1,659 2,289 Prepayments and other 8,199 8,462 ------------ ------------ Total current assets 85,704 124,486 Property and equipment 165,104 178,937 Less accumulated depreciation 86,094 94,051 ------------ ------------ Property and equipment - net 79,010 84,886 Multi-client data library 25,628 28,075 Investments in and advances to joint venture 1,463 3,030 Goodwill (net of accumulated amortization: July, $2,214; October, $2,340) 3,674 3,548 Other assets 3,113 3,860 ------------ ------------ Total $ 198,592 $ 247,885 ============ ============
- --------- See Notes to Consolidated Financial Statements. 1 4 - -------------------------------------------------------------------------------
(Unaudited) July 31, October 31, 1996 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY (AS COMBINED - SEE NOTE 2) Current liabilities: Current maturities of long-term debt $ 13,739 $ 876 Accounts payable - trade 27,454 33,224 Accrued interest 313 336 Other accrued liabilities 19,905 21,369 Income taxes payable 1,814 2,229 ------------ ------------ Total current liabilities 63,225 58,034 Non-current liabilities: Long-term debt-less current maturities 27,351 75,681 Other non-current liabilities 2,093 2,006 ------------ ------------ Total non-current liabilities 29,444 77,687 Stockholders' equity: Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 11,334,352 shares and 14,685,528 shares at July and October, respectively 113 146 Additional paid-in capital 104,469 105,236 Retained earnings (from August 1, 1991 with respect to Digicon Inc.) 2,275 7,443 Cumulative foreign currency translation adjustment (934) (661) ------------ ------------ Total stockholders' equity 105,923 112,164 ------------ ------------ Total $ 198,592 $ 247,885 ============ ============
- --------- See Notes to Consolidated Financial Statements. 2 5 - ------------------------------------------------------------------------------- VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share amounts)
Three Months Ended October 31, ----------------------- 1995 1996 ---------- ---------- (AS COMBINED - SEE NOTE 2) Revenues $ 59,824 $ 76,405 Costs and expenses: Operating expenses 46,806 58,320 Depreciation and amortization 6,352 8,692 Selling, general and administrative 1,580 1,950 Other (income) expense: Merger related costs 597 Interest 1,287 1,263 Other 116 (256) ---------- ---------- Total costs and expenses 56,141 70,566 ---------- ---------- Income before provision for income taxes and equity in (earnings) loss of 50% or less-owned companies and joint ventures 3,683 5,839 Provision for income taxes 1,664 1,238 Equity in (earnings) loss of 50% or less-owned companies and joint ventures 329 (567) ---------- ---------- Net income $ 1,690 $ 5,168 ========== ========== Per share of common stock: Primary: Income per share of common stock $ .10 $ .28 ========== ========== Weighted average shares 17,399 18,382 ========== ========== Fully diluted: Income per share of common stock and common stock equivalent $ .27 ========== ========== Weighted average shares 18,950 ========== ========== Cash dividends None None ========== ==========
- --------- See Notes to Consolidated Financial Statements. 3 6 - ------------------------------------------------------------------------------- VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars)
Three Months Ended October 31, ------------------------ 1995 1996 ---------- ---------- (AS COMBINED - SEE NOTE 2) Operating activities: Net income $ 1,690 $ 5,168 Non-cash items included in net income: Depreciation and amortization 6,352 8,692 Amortization of deferred gain on sale/leaseback (60) Loss on disposition of property and equipment 303 224 Equity in (earnings) loss of 50% or less-owned companies and joint ventures 329 (567) Write-down of multi-client data library to market 99 436 Change in operating assets/liabilities: Accounts and notes receivable 487 (15,021) Materials and supplies inventory 69 (630) Prepayments and other 217 89 Multi-client data library (716) (2,883) Other 753 1,421 Accounts payable - trade (3,597) 4,481 Accrued interest (10) 23 Other accrued liabilities (1,734) 1,464 Income taxes payable 2,242 415 Other non-current liabilities (955) (87) ---------- ---------- Total cash provided by operating activities 5,469 3,225 Financing activities: Borrowing of senior notes 75,000 Debt issues costs (2,461) Borrowings of long-term debt 256 781 Payments of long-term debt (1,314) (28,398) Net borrowings (payments) under credit agreements 813 (11,458) Payment of secured term loan (6,000) Net proceeds from sale of common stock 13 800 Net proceeds from sale of treasury stock 3,982 ---------- ---------- Total cash provided by financing activities 3,750 28,264
- --------- See Notes to Consolidated Financial Statements. 4 7 - ------------------------------------------------------------------------------- VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) UNAUDITED (In thousands of dollars)
Three Months Ended October 31, ------------------------ 1995 1996 ---------- ---------- (AS COMBINED - SEE NOTE 2) Investing activities: Increase in restricted cash investments $ (11) $ (203) Increase in investment in and advances to joint venture (1,235) (1,000) Purchase of property and equipment (5,486) (8,502) Sale of property and equipment 150 667 ---------- ---------- Total cash used by investing activities (6,582) (9,038) Currency (gain) loss on foreign cash 57 214 ---------- ---------- Change in cash and cash equivalents 2,694 22,665 Beginning cash and cash equivalents balance 6,691 10,072 ---------- ---------- Ending cash and cash equivalents balance $ 9,385 $ 32,737 ========== ==========
- --------- See Notes to Consolidated Financial Statements. 5 8 - ------------------------------------------------------------------------------- VERITAS DGC INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars)
Three Months Ended October 31, ------------------- 1995 1996 -------- -------- (AS COMBINED - SEE NOTE 2) Schedule of non-cash investing and financing activities: Increase in property and equipment for: Equipment purchase obligations $ 2,975 $ 5,542 Accounts payable - trade 382 1,289 Supplemental disclosures of cash flow information: Cash paid for: Interest - Revolving credit agreement 529 205 Secured term loans 121 274 Equipment purchase obligations 425 689 Other 220 11 Income taxes 235 613
6 9 - ------------------------------------------------------------------------------- VERITAS DGC 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 of a normal and recurring nature necessary to present fairly the financial position of Veritas DGC Inc. and subsidiaries at October 31, 1996, and the results of its operations and its cash flows for the three months ended October 31, 1995 and 1996. 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 shares issuable upon exchange of Veritas Energy Services Inc. Exchangeable Shares (See Note 2). Primary earnings per share is computed based on the weighted average number of shares of common stock. Fully diluted earnings per share is computed based on the weighted average number of shares of common stock and common stock issuable upon the conversion of stock options and warrants, which are common stock equivalents, calculated under the treasury stock method. TRANSLATION OF FOREIGN CURRENCIES The Company has determined that the United States ("U.S.") dollar is its primary functional currency and, accordingly, translates property and equipment (and related depreciation) and inventories into U.S. dollars at the exchange rate in effect at the time of their acquisition while other assets and liabilities are translated at period end rates. Operating results (other than depreciation) are translated at the average rates of exchange prevailing during the period and remeasurement gains and losses are included in the determination of net income and reflected in other (income) expense (See Note 5). Prior to the Combination (See Note 2), VES used the Canadian dollar as its functional currency and translated all assets and liabilities at period end exchange rates and operating results at average exchange rates prevailing during the period. Adjustments resulting from the translation of assets and liabilities are recorded in the cumulative foreign currency translation adjustment account in the stockholders' equity section. 7 10 - ------------------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENTS In March 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 implemented this statement at the beginning of the fiscal year 1997. Implementation of this pronouncement did not have a material effect on the Company's consolidated financial statements. In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based Compensation." This statement establishes 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. BUSINESS COMBINATION Veritas DGC Inc. was formerly named Digicon Inc. ("Digicon"). On August 30, 1996, Digicon and Veritas Energy Services Inc. ("VES"), a Canadian company, consummated a business combination (the "Combination"). VES became a wholly-owned subsidiary of Digicon and Digicon changed its name to Veritas DGC Inc. (the "Company"). As a result of the Combination, each share of VES no par value common shares outstanding was converted into the right to receive a VES no par value exchangeable share (the "Exchangeable Shares") at an exchange ratio of 0.8 of an Exchangeable Share per VES common share. All of the holders of VES common shares, except for those shareholders who perfected and properly exercised their right to dissent from the Combination and received fair value of their shares in cash, became holders of Exchangeable Shares and, accordingly, 7,023,701 shares of Exchangeable Shares were issued. The aggregate stated capital of the Exchangeable Shares is equal to the aggregate stated capital immediately prior to the Combination of the VES common shares that were exchanged or approximately $30.0 million. The Exchangeable Shares are convertible, at the discretion of the stockholder, on a one-for-one basis into shares of the Company's $0.01 par value 8 11 - ------------------------------------------------------------------------------- common stock and their holders have rights identical to the holders of the Company's common stock. Options to purchase shares of VES common stock ("VES Option") were 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 VES Option. The VES articles of amalgamation were amended to reduce the number of authorized VES common shares to one which is held by the Company The Combination has been accounted for as a pooling of interests and, accordingly, the consolidated financial statements of Digicon and VES have been combined and all prior periods have been restated to give effect to the Combination. Information concerning common stock and per share data has been restated on an equivalent share basis. As a result of differing year ends of Digicon and VES, results of operations for dissimilar year ends will be combined. The Company's results of operations for the years ended July 31, 1995 and prior will be combined with VES' results of operations for the years ended October 31, 1995 and prior. To conform year ends, Digicon's results of operations for the year ended July 31, 1996 will be combined with VES' results of operations for the twelve months ended July 31, 1996. Accordingly, VES' operating results for the period August 1, 1995 through October 31, 1995 will be included in the years ended July 31, 1995 and July 31, 1996. An adjustment in an amount equal to the results of operations for this three-month period will be included in the consolidated statements of changes in stockholders' equity. VES' revenues, net income and net income per share were $22,150,000, $938,000 and $0.05, respectively, for the period August 1, 1995 through October 31, 1995. 9 12 - ------------------------------------------------------------------------------- Presented below is the effect the pooling of interests will have on the Company's reported results of operations. Amounts related to VES have been converted into the Company's reporting currency, U.S. dollars, using weighted average exchange rates prevailing during the period and reflects adjustments for differences between U.S. and Canadian generally accepted accounting principles ("GAAP") and reclassifications to conform financial statement presentation. Canadian to U.S. 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 ($90,000), ($25,000) and ($173,000) for the three months ended October 31, 1995 and for the years ended July 31, 1995, and 1996, respectively, and (ii) reverse the effect of a prior period adjustment affecting net income by approximately $90,000, $314,000 and $102,000 for the three months ended October 31, 1995 and for the years ended July 31, 1995 and 1996, respectively. Reclassification of $6,985,000, $25,493,000 and $28,842,000 for the three months ended October 31, 1995 and for the years ended July 31, 1995 and 1996, respectively, have been made to net amounts billed to customers for reimbursable costs against VES' revenues.
Three Months Ended October 31, Years Ended July 31, ------------ ---------------------------- 1995 1995 1996 ------------ ------------ ------------ (In thousands of dollars) Revenues: Digicon $ 37,674 $ 131,127 $ 160,847 VES 29,135 109,996 118,591 Reclassifications (6,985) (25,493) (28,842) ============ ============ ============ Total $ 59,824 $ 215,630 $ 250,596 ============ ============ ============ Net income: Digicon $ 752 $ 2,778 $ 385 VES 938 2,527 967 Adjustments 289 (71) ------------ ------------ ------------ Total $ 1,690 $ 5,594 $ 1,281 ============ ============ ============ Net income per share: As previously reported $ .07 $ .25 $ .03 ============ ============ ============ As restated $ .10 $ .31 $ .07 ============ ============ ============
There are no material adjustments to the net assets of VES as a result of adopting the same accounting principles as the Company. During the year ended July 31, 1996 and the three months ended October 31, 1996, the Company incurred and expensed $3,666,000 and $597,000, respectively of costs associated with the merger. These costs consists primarily of professional fees. Costs for the three months ended October 31, 1996 include $150,000 payable to a stockholder who was the former Chairman of the Board of Directors for consulting services rendered in conjunction with the merger. 10 13 - ------------------------------------------------------------------------------- 3. INVESTMENT IN INDONESIAN JOINT VENTURE Summarized financial information for the Company's Indonesian joint venture which is accounted for under the equity method is as follows:
Three Months Ended October 31, ------------------------ 1995 1996 ---------- ---------- (In thousands of dollars) Revenues $ 504 $ 3,296 Operating expenses 720 2,365 Depreciation and amortization 107 288 Other 6 1 ---------- ---------- Total 833 2,654 Income (loss) before provision for income taxes (329) 642 Provision for income taxes 75 ---------- ---------- Net income (loss) $ (329) $ 567 ========== ==========
4. LONG-TERM DEBT The Company's long-term debt is as follows:
July 31, October 31, 1996 1996 ---------- ---------- (AS COMBINED - SEE NOTE 2) (In thousands of dollars) Senior notes due October 2003, at 9.75% $ 75,000 Revolving credit agreement due July 1998, at LIBOR plus 2% or prime $ 11,458 Secured term loan due July 1999, at prime plus3/4% 6,000 Secured term loan due July 1999, at prime plus1/2% 1,240 Secured term loan due July 1999, at prime plus1/2% 2,832 Equipment purchase obligations maturing through July 1999, at a weighted average rate of 9.59% at October 31, 1996 19,319 1,314 Mortgage note payable due October 2005, at 10% 241 243 ---------- ---------- Total 41,090 76,557 Less current maturities 13,739 876 ========== ========== Due after one year $ 27,351 $ 75,681 ========== ==========
The senior notes are due in October 2003 with interest payable semi-annually at 9 3/4%. The senior notes are unsecured and are effectively subordinated to secured debt of the Company with respect to the assets securing such debt and to all debt of its subsidiaries whether secured or unsecured. The indenture relating to the senior notes contains certain 11 14 - ------------------------------------------------------------------------------- covenants which limit the Company's ability to, among other things, incur additional debt, pay dividends and complete mergers, acquisitions and sales of assets. Upon a change in control of the Company, as defined in the Indenture, the holders of the senior notes have the right to require the Company to purchase all or a portion of such holder's senior note at a price equal to 101% of the aggregate principal amount. The Company has the right to redeem the senior notes, in whole or in part, on or after October 15, 2000. Under certain conditions, the Company may redeem up to $20.0 million in aggregate principle amount of the senior notes prior to October 15, 1999. The revolving credit agreement due July 1998, as amended, is with a commercial bank and provides a facility of up to $15.0 million. Advances are secured by substantially all of the receivables of the Company, bear interest, at the Company's election, at LIBOR plus two percent or prime rate and are limited by a borrowing formula. Covenants in the agreement limit, among other things, the Company's right, without consent of the lender, to take certain actions, including creating indebtedness and paying dividends, and limit the Company's capital expenditures in any fiscal year. In addition, the agreement requires minimum cash flow coverage and the maintenance of minimum tangible net worth, limits the ratio of funded debt to total capitalization, and requires the Company to maintain a minimum current ratio. The secured term loan due July 1999 was with a commercial bank, was due in 36 monthly installments of $166,667 plus interest at prime plus 3/4% and was secured by a majority of the assets of the Company (except those assets directly or indirectly owned by VES). The secured term loan was paid with proceeds from the senior notes. The secured term loans due July 1999 provided for advances for equipment purchases up to Canadian $4.0 million and Canadian $5.5 million, respectively, and advances were payable in 36 equal monthly installments. Advances bore interest at the prime rates (as defined) plus .5% and were secured by the equipment purchased. The agreements required VES to maintain certain financial ratios. Advances under the secured term loans were paid with proceeds from the senior notes. The Company's equipment purchase obligations represent installment loans and capitalized lease obligations primarily related to computer and seismic equipment. Substantially all the equipment purchase obligations were paid with proceeds from the senior notes. The mortgage note is payable in monthly installments of Canadian $4,800 including interest at 10% and is secured by a building. 12 15 - ------------------------------------------------------------------------------- 5. OTHER (INCOME) EXPENSE Other (income) expense consists of the following:
Three Months Ended October 31, -------------------- 1995 1996 -------- -------- (AS COMBINED, SEE NOTE 2) (In thousands of dollars) Net foreign currency exchange (gain) loss $ 20 $ (395) Net loss on disposition of property and equipment 303 224 Interest income (173) (95) Other (34) 10 -------- -------- Total $ 116 $ (256) ======== ========
13 16 - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's internal sources of liquidity are cash and short-term investments and cash flow from operations. External sources include the unutilized portion of a revolving credit facility, equipment financing and trade credit. In October 1996, the Company effected a public offering of $75.0 million of 9 3/4% senior notes due 2003 (the "Senior Notes") which generated approximately $72.2 million of net proceeds. The indenture relating to the Senior Notes (the "Indenture") contains certain covenants, including covenants which limit the Company's ability to, among other things, incur additional debt, pay dividends and complete mergers, acquisitions and sales of assets. Upon a change of control of the Company (as defined in the Indenture), holders of the Senior Notes have the right to require the Company to purchase all or a portion of such holder's Senior Note at a price equal to 101% of the aggregate principal amount. The Company maintains a $15.0 million revolving credit facility, as amended (the "Credit Facility"), with a commercial bank which will mature in July 1998. Advances under the Credit Facility are secured by substantially all of the Company's receivables, bear interest, at the Company's election, at LIBOR plus two percent or prime rate and are limited by a borrowing formula which, based on current levels of receivables, results in a borrowing base well in excess of the maximum commitment. Covenants in the Credit Facility limit, among other things, the Company's right, without consent of the lender, to take certain actions, including creating indebtedness and paying dividends and limit the Company's capital expenditures in any fiscal year. In addition, the Credit Facility requires minimum cash flow coverage and the maintenance of minimum tangible net worth, limits the ratio of funded debt to total capitalization, and requires the Company to maintain a minimum current ratio. The Company requires significant amounts of working capital to support its operations and to fund capital spending and research and development programs. The Company's foreign operations 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. Approximately 59% of revenues for the quarter ended October 31, 1996 are attributable to the Company's export sales and foreign operations. In addition, the Company has increased its participation in multi-client data surveys and has significantly expanded its library of multi-client data. Because of the lead time between survey execution and sale, multi-client data surveys generally require greater amounts of working capital than contract work. Depending on 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. 14 17 - ------------------------------------------------------------------------------- Approximately $49.8 million of the net proceeds from the Senior Notes has been used to retire outstanding indebtedness of the Company (including borrowings under the Credit Facility). The remaining net proceeds are being used to fund a portion of the Company's $67.4 million capital expenditure budget for fiscal 1997. It is anticipated that the balance of the 1997 capital expenditure budget will be financed from internally generated funds, and, if necessary, from the Credit Facility or other borrowings permitted by the Indenture and Credit Facility. Of the $67.4 million capital expenditure budget, approximately $7.7 million represents capital spending necessary to maintain the Company's operating equipment and the remainder is for discretionary capital spending, including approximately $26.2 million for the replacement of older operating equipment with a view to substantially enhancing operating efficiency. The remaining $33.5 million will be used for expansion of its equipment complement to meet increased demand for seismic services. The Company will require substantial cash flow to continue operations on a satisfactory basis, complete its capital expenditure and research and development programs, and meet its principal and interest obligations with respect to the Senior Notes. The Company anticipates that cash and short-term investments, cash flow generated from operations and borrowings permitted under the Indenture and Credit Facility will provide sufficient liquidity to fund these requirements until the Senior Notes become due in 2003. However, the Company's ability to meet its debt service and other obligations depends on its future performance, which, in turn, is subject to general economic conditions, business and other factors beyond the Company's control. If the Company is unable to generate sufficient cash flow from operations or otherwise to comply with the terms of the Credit Facility or the Indenture, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There can be no assurances that the Company would be able to obtain such refinancing or financing, or that any refinancing or financing would result in a level of net proceeds required. 15 18 - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three Months Ended October 31, 1996 compared with Three Months Ended October 31, 1995 Revenues. Land data acquisition revenues increased $8.7 million or 27%. During the quarter, the Company increased its transition zone activities which generate higher revenues and margins than highland operations. The Company added an Input/Output System Two - RSR crew to its transition zone operations and moved an Input/Output System Two - MRX crew from its transition zone to its highlands operation in Peru. One of the three highland crews operating in Argentina was mobilized to Ecuador to begin operations in November. All land recording equipment is now fully upgraded, although some further standardization of cables and geophones will continue throughout the year. Marine data acquisition revenues increased $7.4 million or 83% primarily due to increased utilization of the Company's vessels. In the prior year's quarter, one of the Company's vessels was in transit from the North Sea to the Gulf of Mexico and two vessels experienced downtime while a third vessel was being rigged for multi-boat configuration. During the current quarter, there were better weather conditions in the Gulf of Mexico, an area which in the prior quarter had experienced one of the worst hurricane seasons in many years. Production increased during the current period due to surveys which had fewer shooting obstructions and program designs which improved equipment utilization. Marine revenues also improved due to the addition of a vessel to complete projects in the North Sea as well as an increase in funding on multi-client data surveys. Seismic data processing revenues increased $1.8 million or 15% due to increased capacity and increased volumes of marine data acquired in the North Sea to be processed. During the quarter the Company has upgraded four major marine centers, installed an NEC supercomputer in house and added new processing centers in Oklahoma City and Quito, Ecuador. Sales from the licensing of multi-client data surveys decreased $1.4 million or 25% mainly because of a shift in oil and gas companies' budgets from multi-client data library licensing to multi-client data survey acquisition contracts. The Company expects sales to increase during the next quarter which is typically the end of the budget period for many oil and gas companies. Operating Expenses. Costs of services increased $11.5 million or 25% but as a percent of revenues decreased from 78% to 76%. The improvement in operating margins is mainly attributable to marine data acquisition as a result of increased utilization and data processing as a result of increased capacity as discussed above. These improvements were offset by a decline in land margins caused by lower contract prices, delays in the startup of the new crew in South America and adverse weather conditions in the U.S. highlands. Depreciation and Amortization. Depreciation and amortization expense increased 37% from $6.4 million to $8.7 million due to increased equipment purchases. Merger Related Costs. Merger related costs are a result of the Combination discussed in Note 2 of Notes to the Consolidated Financial Statements. 16 19 - ------------------------------------------------------------------------------- Selling, General and Administrative. Selling, general and administrative expenses increased 23% from $1.6 million to $2.0 million, resulting primarily from additional costs incurred in implementing new administrative and accounting data processing systems. Interest. Interest expense was comparable with the prior year. Increased average debt levels were offset by improved interest rates. Other. Other (income) expense increased from an expense of $116,000 to income of $256,000 resulting primarily from increased net foreign currency exchange gains. Income Taxes. Provision for income taxes decreased from $1.7 million to $1.2 million reflecting improved tax rates as a result of restructuring the operations of certain of the Company's subsidiaries and taxable losses in Canada. Equity in (Earnings) Losses. Equity in (earnings) losses is attributable to the Company's Indonesian joint venture which performed profitable marine acquisition services in the current year. 17 20 - ------------------------------------------------------------------------------- PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to, nor is its property the subject of, any material pending legal proceedings, as defined by relevant rules and regulations of the Securities and Exchange Commission. Item 2. Changes in Securities On October 18, 1996, the Company issued senior notes in the amount of $75.0 million which bear interest at 9 3/4% and mature in 2003. The senior notes were issued under an indenture which limits the payment of dividends. Item 4. Submission of Matters to a Vote of Security Holders On August 20, 1996, a Special Meeting of Stockholders of Veritas DGC Inc. (formerly Digicon Inc. ("Digicon")) was held; 1. To consider and vote upon a proposal to approve the Combination Agreement dated as of May 10, 1996, between Digicon and Veritas Energy Services Inc., an Alberta, Canada corporation ("Veritas"), and the transactions contemplated thereby. Votes cast for the above matter were 8,434,738; votes against the above matter were 14,424. There were 7,510 abstentions. 2. To consider and vote upon a recapitalization plan pursuant to which Digicon's Restated Certificate of Incorporation would be amended and restated (a) to authorize a class of 40,000,000 ordinary shares, $.01 par value ("Ordinary Shares"), (b) to reclassify the currently outstanding common stock as a series of Ordinary Shares having the same rights and privileges, (c) to designate a series of Ordinary Shares as Special Voting Stock consisting of one share, (d) to change Digicon's name to "Veritas DGC Inc." and (e) to add provisions regarding Digicon's obligation to comply with the terms of the exchangeable shares of Veritas. Votes cast for the above matter were 8,359,820; votes against the above matter were 9,034. There were 87,818 abstentions. 18 21 - ------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K a) Exhibits filed with this report: 3-A) Restated Certificate of Incorporation of Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) By-laws of New Digicon Inc. dated June 24, 1991 (Exhibit 3-I to Digicon Inc.'s Form 10-K for the year ended July 31, 1991, is incorporated herein by reference.) 4-A) Specimen certificate for Senior Notes. (Included as part of Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-C) Specimen Veritas DGC Inc. common stock certificate. (Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996, is incorporated herein by reference.) 10-A Salary Continuation Agreement executed by Nicholas A. C. Bright, Kevin P. Callaghan, Richard W. McNairy and Allan C. Pogach. (Incorporated herein by reference to Exhibit 10-E of Digicon Inc.'s Annual Report on Form 10-K for the year ended July 31, 1994) 10-B Salary Continuation Agreement executed by Stephen J. Ludlow (Incorporated herein by reference to Exhibit 10-B of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996) 10-C Asset Purchase Agreement dated August 31, 1994, between Syntron, Inc. and Digicon Gephysical Corp., Euroseis, Inc., Digicon/GFS Inc. and Digicon Inc. (Incorporated herein by reference to Exhibit 10-M of Digicon Inc.'s Annual Report on Form 10-K for the year ended July 31, 1994) 10-D 1992 Non-Employee Director Stock Option Plan. (Incorporated herein by reference to Exhibit 10-T of Digicon Inc.'s Amendment No. 3 to Registration Statement No. 33-54384, dated December 17, 1992) 10-E Amended and Restated 1992 Employee Nonqualified Stock Option Plan. (Incorporated herein by reference to Exhibit 10-E of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996) 10-F Support Agreement dated August 30, 1996, between Digicon Inc. and Veritas Energy Services Inc. (Incorporated herein by reference to Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K, dated August 30, 1996) 10-G Credit Agreement dated July 18, 1996, among Digicon Inc. and Digicon Geophysical Corp., Digicon/GFS Inc., Digicon Geophysical Limited and Digicon Exploration, Ltd., as Borrowers, each of the banks named therein, and Wells Fargo Bank (Texas), National Association, as issuing bank, as a bank and as agent for the banks (the "Credit Agreement") (Incorporated herein by reference to Exhibit 10-G of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996) 10-H Letter dated September 27, 1996, from Wells Fargo Bank (Texas), National Association, agreeing to amend the Credit Agreement (Incorporated herein by reference to Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996) * 11) Computation of income per common and common equivalent share for the three months ended October 31, 1995 and 1996. * 27) Financial Data Schedule - --------------- * Filed herewith b) Reports on Form 8-K 1) A Form 8-K dated August 30, 1996 reported the Combination of Digicon Inc. and Veritas Energy Services Inc. 19 22 - ------------------------------------------------------------------------------- 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. VERITAS DGC INC. ------------------------------------------- (Registrant) Date: December 13, 1996 By: /s/ David B. Robson ----------------- ------------------------------------------- David B. Robson (Chairman of the Board and Chief Executive Officer) Date: December 13, 1996 By: /s/ Richard W. McNairy ----------------- ------------------------------------------- Richard W. McNairy (Chief Accounting and Financial Officer) 23 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3-A) Restated Certificate of Incorporation of Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) By-laws of New Digicon Inc. dated June 24, 1991 (Exhibit 3-I to Digicon Inc.'s Form 10-K for the year ended July 31, 1991, is incorporated herein by reference.) 4-A) Specimen certificate for Senior Notes. (Included as part of Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-C) Specimen Veritas DGC Inc. common stock certificate. (Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996, is incorporated herein by reference.) * 11) Computation of income per common and common equivalent share for the three months ended October 31, 1995 and 1996. * 27) Financial Data Schedule
- --------------- * Filed herewith EX-11 2 COMPUTATION OF INCOME PER COMMON SHARE 1 - ------------------------------------------------------------------------------- EXHIBIT 11 COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts)
Three Months Ended October 31, -------------------------- 1995 1996 ---------- ---------- PRIMARY INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 17,399 18,382 ========== ========== Primary income per share $ .10 $ .28 ========== ========== FULLY DILUTED INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 17,399 18,382 Shares issuable from assumed conversion of: Warrants 13 174 Stock options 4 394 ---------- ---------- Weighted average shares of common stock outstanding, as adjusted 17,416 18,950 ========== ========== Fully diluted income per share $ .10(2) $ .27 ========== ========== NET INCOME FOR PRIMARY AND FULLY DILUTED COMPUTATION: Net income $ 1,690 $ 5,168 ========== ==========
- --------------- (1) Weighted average shares of common stock outstanding for all periods have been restated to include Exchangeable Stock (See Note 2 of Notes to the Consolidated Financial Statements) on an equivalent share basis. (2) 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 VERITAS DGC INC'S FORM 10-Q FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1,000 3-MOS JUL-31-1997 AUG-01-1996 OCT-31-1996 32,737 0 80,851 383 2,289 124,486 178,937 94,051 247,885 58,034 75,681 0 0 146 112,018 247,885 0 76,405 0 58,320 12,246 0 1,263 5,839 1,238 5,168 0 0 0 5,168 .28 .27
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