-----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, NaNtElNIl+2ftbXZf8b0C0QI6x4yhxXjHFMIJK66+xWXbTvBDGezuOLDIpPJqZg7 Ks9WHrdPlV8GHpBLDGPL0Q== 0000950129-97-001054.txt : 19970318 0000950129-97-001054.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950129-97-001054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970317 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: 97557569 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. - 01/31/97 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 JANUARY 31, 1997 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 (the "Common Stock"), $.01 par value, outstanding at February 28, 1997 was 18,790,907 (including 2,406,583 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 January 31, 1997 1 Consolidated Statements of Operations - For the Three and Six Months Ended January 31, 1996 and 1997 3 Consolidated Statements of Cash Flows - For the Six Months Ended January 31, 1996 and 1997 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 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars, except par value)
(Unaudited) July 31, January 31, 1996 1997 ---------- ---------- ASSETS (AS COMBINED - SEE NOTE 2) Current assets: Cash and short-term investments $ 10,072 $ 15,523 Restricted cash investments 327 537 Accounts and notes receivable (net of allowance for doubtful accounts: July, $740; January, $505) 65,447 105,140 Materials and supplies inventory 1,659 2,126 Prepayments and other 8,199 6,532 ---------- ---------- Total current assets 85,704 129,858 Property and equipment 165,104 197,682 Less accumulated depreciation 86,094 102,668 ---------- ---------- Property and equipment - net 79,010 95,014 Multi-client data library 25,628 27,139 Investments in and advances to joint venture 1,463 1,379 Goodwill (net of accumulated amortization: July, $2,214; January, $2,475) 3,674 3,413 Other assets 3,113 3,655 ---------- ---------- Total $ 198,592 $ 260,458 ========== ==========
- ----------------- See Notes to Consolidated Financial Statements. 1 4
(Unaudited) July 31, January 31, 1996 1997 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY (AS COMBINED - SEE NOTE 2) Current liabilities: Current maturities of long-term debt $ 13,739 $ 480 Accounts payable - trade 27,454 28,487 Accrued interest 313 2,189 Other accrued liabilities 19,905 27,769 Income taxes payable 1,814 3,133 ---------- ---------- Total current liabilities 63,225 62,058 Non-current liabilities: Long-term debt - less current maturities 27,351 75,186 Other non-current liabilities 2,093 2,129 ---------- ---------- Total non-current liabilities 29,444 77,315 Stockholders' equity: Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 11,334,352 shares and 16,148,926 shares at July and January, respectively 113 161 Additional paid-in capital 104,469 107,635 Retained earnings (from August 1, 1991 with respect to Digicon Inc.) 2,275 13,950 Cumulative foreign currency translation adjustment (934) (661) ---------- ---------- Total stockholders' equity 105,923 121,085 ---------- ---------- Total $ 198,592 $ 260,458 ========== ==========
- --------------------- 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 Six Months Ended January 31, January 31, -------------------------- -------------------------- 1996 1997 1996 1997 ----------- ----------- ----------- ----------- (AS COMBINED - SEE NOTE 2) Revenues $ 62,719 $ 90,691 $ 122,543 $ 167,096 Costs and expenses: Operating expenses 53,297 67,982 100,103 126,302 Depreciation and amortization 6,695 9,828 13,047 18,520 Selling, general and administrative 1,824 2,432 3,404 4,382 Other (income) expense: Merger related costs 597 Interest 1,387 1,967 2,674 3,230 Other (72) 532 44 276 ----------- ----------- ----------- ----------- Total costs and expenses 63,131 82,741 119,272 153,307 ----------- ----------- ----------- ----------- Income (loss) before provision for (benefit from) income taxes and equity in earnings of 50% or less-owned companies and joint ventures (412) 7,950 3,271 13,789 Provision for (benefit from) income taxes (536) 1,681 1,128 2,919 Equity in earnings of 50% or less- owned companies and joint ventures (1,145) (238) (816) (805) ----------- ----------- ----------- ----------- Net income $ 1,269 $ 6,507 $ 2,959 $ 11,675 =========== =========== =========== =========== Per share of common stock: Income per share of common stock $ .07 $ .35 $ .17 $ .63 =========== =========== =========== =========== Weighted average shares 17,938 18,639 17,663 18,510 =========== =========== =========== =========== Cash dividends None None 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)
Six Months Ended January 31, ---------------------------- 1996 1997 ------------ ------------ (AS COMBINED - SEE NOTE 2) Operating activities: Net income $ 2,959 $ 11,675 Non-cash items included in net income: Depreciation and amortization 13,047 18,520 Amortization of deferred gain on sale/leaseback (90) Loss on disposition of property and equipment 360 439 Equity in earnings of 50% or less-owned companies and joint ventures (816) (805) Write-down of multi-client data library to market 198 767 Change in operating assets/liabilities: Accounts and notes receivable (4,473) (39,693) Materials and supplies inventory (1,447) (467) Prepayments and other 867 1,667 Multi-client data library 3,387 (2,278) Other (2,698) 2,319 Accounts payable - trade 65 (1,420) Accrued interest 13 1,876 Other accrued liabilities 2,051 7,773 Income taxes payable (71) 1,319 Other non-current liabilities (651) 36 ------------ ------------ Total cash provided by operating activities 12,701 1,728 Financing activities: Borrowing of senior notes 75,000 Debt issues costs (2,765) Borrowings of long-term debt 781 Payments of long-term debt (4,618) (29,289) Net payments under credit agreements (1,096) (11,458) Payment of secured term loan (6,000) Net proceeds from sale of common stock 13 3,214 Net proceeds from sale of treasury stock 3,972 ------------ ------------ Total cash provided (used) by financing activities (1,729) 29,483
- -------------------- See Notes to Consolidated Financial Statements. 4 7 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) UNAUDITED (In thousands of dollars)
Six Months Ended January 31, ------------------------ 1996 1997 ---------- ---------- (AS COMBINED - SEE NOTE 2) Investing activities: (Increase) decrease in restricted cash investments $ 338 $ (210) (Increase) decrease in investment in and advances to joint venture (260) 889 Purchase of property and equipment (9,329) (27,406) Sale of property and equipment 422 699 Other (76) ---------- ---------- Total cash used by investing activities (8,905) (26,028) Currency (gain) loss on foreign cash (55) 268 ---------- ---------- Change in cash and cash equivalents 2,012 5,451 Beginning cash and cash equivalents balance 6,691 10,072 ---------- ---------- Ending cash and cash equivalents balance $ 8,703 $ 15,523 ========== ==========
- ------------- 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)
Six Months Ended January 31, ----------------------- 1996 1997 ---------- ---------- (AS COMBINED - SEE NOTE 2) Schedule of non-cash investing and financing activities: Increase in property and equipment for: Equipment purchase obligations $ 2,788 $ 5,542 Accounts payable - trade 2,040 2,453 Supplemental disclosures of cash flow information: Cash paid for: Interest - Revolving credit agreements 1,036 205 Secured term loans 242 274 Equipment purchase obligations 977 748 Other 443 150 Income taxes 2,509 1,333
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 ("the Company") at January 31, 1997, and the results of its operations and its cash flows for the three and six months ended January 31, 1996 and 1997. 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. ("VES") Exchangeable Shares (See Note 2). Earnings per share are computed based on the weighted average number of shares of common stock. Shares issuable upon the conversion of stock options and warrants, which are common stock equivalents, were disregarded since the treasury stock method of calculation resulted in dilution of less than 3%. 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 of the pooling of interests 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 reflect 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 on borrowings which are deferred and amortized over the period of the debt affecting net income by approximately $17,000 and $107,000 for the three and six months ended January 31, 1996, respectively, and (ii) reverse the effect of a prior period adjustment reducing net income by approximately $90,000 for the six months ended January 31, 1996. Reclassification of $10,844,000 and $17,829,000 for the three and six months ended January 31, 1996, respectively, have been made to net amounts billed to customers for reimbursable costs against VES' revenues.
Three Months Six Months Ended Ended January 31, January 31, 1996 1996 ----------- ----------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Revenues: Digicon $ 38,755 $ 76,429 VES 34,808 63,943 Reclassifications (10,844) (17,829) ----------- ----------- Total $ 62,719 $ 122,543 =========== =========== Net income: Digicon $ 1,077 $ 1,829 VES 209 1,147 Adjustments (17) (17) ----------- ----------- Total $ 1,269 $ 2,959 =========== =========== Net income per share: As previously reported $ .10 $ .17 =========== =========== As restated $ .07 $ .17 =========== ===========
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 six months ended January 31, 1997, the Company incurred and expensed $3,666,000 and $597,000, respectively, of costs associated with the merger. These costs consist primarily of professional fees. Costs for the six months ended January 31, 1997 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 Six Months Ended January 31, January 31, ---------------------- --------------------- 1996 1997 1996 1997 --------- --------- --------- --------- (IN THOUSANDS OF DOLLARS) Revenues $ 1,313 $ 940 $ 1,817 $ 4,236 Operating expenses 69 679 789 3,044 Depreciation and amortization 106 102 213 390 Other (12) (4) (6) (3) --------- --------- --------- --------- Total 163 777 996 3,431 Income before benefit from income taxes 1,150 163 821 805 Benefit from income taxes (75) --------- --------- --------- --------- Net income $ 1,150 $ 238 $ 821 $ 805 ========= ========= ========= =========
4. LONG-TERM DEBT The Company's long-term debt is as follows:
July 31, January 31, 1996 1997 ---------- ---------- (AS COMBINED - SEE NOTE 2) (IN THOUSANDS OF DOLLARS) Senior notes due October 2003, at 9 3/4% $ 75,000 Revolving credit agreement due July 1998, at LIBOR plus 2% or prime $ 11,458 Secured term loan due July 1999, at prime plus 3/4% 6,000 Secured term loan due July 1999, at prime plus 1/2% 1,240 Secured term loan due July 1999, at prime plus 1/2% 2,832 Equipment purchase obligations maturing through July 1999, at a weighted average rate of 8.6% at January 31, 1997 19,319 666 Mortgage note payable due October 2005, at 10% 241 ---------- ---------- Total 41,090 75,666 Less current maturities 13,739 480 ---------- ---------- Due after one year $ 27,351 $ 75,186 ========== ==========
11 14 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 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 principal 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 1/2% 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 was payable in monthly installments of Canadian $4,800 including interest at 10% and was secured by a building. The mortgage note was paid with proceeds from the senior notes. 12 15 5. OTHER (INCOME) EXPENSE Other (income) expense consists of the following:
Three Months Ended Six Months Ended January 31, January 31, ------------------ ------------------ 1996 1997 1996 1997 ------- ------- ------- ------- (AS COMBINED - SEE NOTE 2) (IN THOUSANDS OF DOLLARS) Net foreign currency exchange loss $ 9 $ 619 $ 29 $ 224 Net loss on disposition of property and equipment 57 215 360 439 Interest income (122) (283) (295) (378) Other (16) (19) (50) (9) ------- ------- ------- ------- Total $ (72) $ 532 $ 44 $ 276 ======= ======= ======= =======
6. RELATED PARTY TRANSACTION On November 30, 1996, the Company entered into agreements to purchase property and equipment in the amount of approximately $1.5 million from companies which were partially owned by certain nonexecutive employees of the Company. 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. Interest is payable semi-annually beginning April 1997. 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 57% of revenues for the six months ended January 31, 1997 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. 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 $70.0 million capital expenditure budget for fiscal 1997. It is anticipated that the balance of the 1997 capital 14 17 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 $70.0 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 of substantially enhancing operating efficiency. The remaining $36.1 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 January 31, 1997 compared with Three Months Ended January 31, 1996. Revenues. Land and transition zone seismic data acquisition revenues in the second quarter increased $17.6 million or 68% over the same period last year. Crews operating in the second quarter increased to 17 from 14 and the total number of channels increased to 21,000 from 17,500 compared with the same period of the prior year. Strong seasonal market demand for crews in Canada coupled with larger channel requirements for the U.S. highlands and transition markets accounted for the higher capacity. The Canadian market is showing stronger demand for off season work, and other land markets are experiencing longer term contracts and increased activity. The higher activity levels are resulting in improved contract prices and weather protection clauses to ensure crew availability. Marine acquisition revenues were $1.7 million or 16% higher than the same quarter of the prior year, primarily due to increased vessel utilization. The marine vessels Polar Search and Polar Princess which were operating in the North Sea have been mobilized to the Gulf of Mexico. The Polar Princess completed a survey in the Falklands en route to the Gulf of Mexico and is presently in the shipyard being upgraded to 7200 meter Syntron RDA streamer capability. The Polar Search completed its upgrade to the 7200 meter Syntron RDA streamers early in the second quarter. The upgrade to more channels coupled with high production for all vessels worldwide and improving prices in the contract market are yielding higher margins. Revenues from the Company's seismic data processing operations increased $3.9 million or 28% over the same period last year due to the installation of new HP KittyHawk Systems in the major marine data processing centers and the new NEC Supercomputer in Houston as a result of rising demand. Additionally, land data processing centers set up in the prior quarter in Oklahoma City and Quito, Ecuador were in full production. A center in Abu Dhabi was set up late in the second quarter, and full-time production is expected to be achieved late in the third quarter. In the coming fiscal third quarter, the long-term contract operation of a dedicated center will be completed. The personnel from that center will be re-deployed to the Houston and Crawley, England centers to process the higher production requirements of those centers. Multi-client data sales rose by $4.7 million or 41% over the same period last year. The higher data sales reflect increased activity levels in the North Sea and Gulf of Mexico markets. Due to increasing customer interest in deep-water and sub-salt areas of the Gulf of Mexico, demand for larger inventory levels in these areas is increasing. Surveys in the Shetland-Faroes area, Gulf of Mexico deep-water basin and smaller selected Far East areas are planned over the coming months. The Company initiated its first land data library project in the U.S. and will be expanding projects in this area. Operating Expenses. Costs of services increased $14.7 million or 28% over the same period last year but as a percent of revenues decreased from 85% to 75%. The improvement in operating margins is attributable to all service groups as a result of increased demand, higher prices, better equipment utilization and increased capacity as discussed above. 16 19 Depreciation and Amortization. Depreciation and amortization expense increased 47% from $6.7 million to $9.8 million due to the significant 1997 capital expenditure program as previously discussed. Selling, General and Administrative. Selling, general and administrative expenses increased 33% from $1.8 million to $2.4 million, resulting primarily from costs incurred in a more aggressive marketing strategy and in implementing new administrative and accounting data processing systems. Interest. Interest expense increased $580,000 due to increased debt levels to finance the Company's 1997 capital expenditure program. Other. Other (income) expense decreased from income of $72,000 to an expense of $532,000 resulting primarily from net foreign currency exchange losses. Income Taxes. Provision for income taxes increased from a $536,000 benefit to a $1.7 million provision as a result of the increased profitability of the Company. The effective tax rate was reduced in the current year by restructuring the operations of certain of the Company's subsidiaries. Equity in Earnings. Equity in earnings is attributable to the Company's Indonesian joint venture which performed profitable marine acquisition services in the prior year. Six Months Ended January 31, 1997 compared with Six Months Ended January 31, 1996. Revenues. Land and transition zone seismic data acquisition revenues for the year increased $26.3 million or 46% over the same period last year due to strong market demand in Canada and improving prices. During the current year the Company also added an Input/Output System Two-RSR crew to its transition zone operations and increased the number of land crews and channels in operation. Marine acquisition revenues were $9.2 million or 46% higher than the same period of the prior year primarily due to increased utilization of the Company's vessels and the addition of a vessel. In the prior year, vessels experienced downtime related to vessel upgrades and mobilization and bad weather. Lower production also resulted from shooting obstructions and program designs. The Company's seismic data processing operations increased $5.7 million or 21% over the same period last year due to increased capacity and increased volumes of marine data available for processing. The Company has substantially upgraded its marine data processing centers and added a new NEC supercomputer in Houston. The Company also added new centers in Quito, Ecuador and Oklahoma City. Multi-client data sales rose by $3.3 million or 19% over the same period last year due to increasing customer interest in the North Sea and Gulf of Mexico multi-client data surveys. In general, demand has increased for multi-client data surveys. 17 20 Operating Expenses. Costs of services increased $26.2 million or 26%, but as a percent of revenues decreased from 82% to 76%. The improvement in operating margins is attributable to all service groups as a result of increased demand, higher prices, better equipment utilization and increased capacity as discussed above. Depreciation and Amortization. Depreciation and amortization expense increased 42% from $13.0 million to $18.5 million due to the significant 1997 capital expenditure program. Selling, General and Administrative. Selling, general and administrative expenses increased 29% from $3.4 million to $4.4 million, resulting primarily from costs incurred in a more aggressive marketing strategy and in implementing new administrative and accounting data processing systems. Merger Related Costs. Merger related costs are a result of the Combination discussed in Note 2 of Notes to the Consolidated Financial Statements. Interest. Interest expense increased $556,000 due to increased debt levels to finance the Company's 1997 capital expenditure program. Other. Other expense increased $232,000 primarily due to net foreign currency exchange losses. Income Taxes. Provision for income taxes increased from $1.1 million to $2.9 million as a result of increased profitability of the Company. The effective tax rate was reduced in the current year by restructuring the operations of certain of the Company's subsidiaries. 18 21 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 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of stockholders was held on December 16, 1996. Common stockholders of record on November 1, 1996 were entitled to vote. Each of the eight directors nominated for the board of directors was elected by the stockholders as follows:
FOR WITHHELD ---------- ------------ George F. Baker 14,197,948 100 Clayton P. Cormier 14,197,946 0 Ralph M. Eeson 14,197,946 700 Lawrence C. Fichtner 14,197,946 0 Steve J. Gilbert 12,044,174 2,340,290 Stephen J. Ludlow 14,197,746 200 Brian F. MacNeill 14,197,746 450 David B. Robson 14,197,746 200 Douglas B. Thompson 14,197,746 200 Jack C. Threet 14,197,746 1,050
19 22 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 Geophysical 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) 20 23 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 and six months ended January 31, 1996 and 1997. *27) Financial Data Schedule *Filed herewith b) Reports on Form 8-K 1) A Form 8-K dated November 27, 1996, as amended by Form 8-K/A-1 dated December 4, 1996, reported a change in the Company's principal accountants. 21 24 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: March 17, 1997 By: /s/ David B. Robson ----------------------- ---------------------------------------- David B. Robson (Chairman of the Board and Chief Executive Officer) Date: March 17, 1997 By: /s/ Richard W. McNairy ----------------------- ---------------------------------------- Richard W. McNairy (Chief Accounting and Financial Officer) 22 25 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.) 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 Geophysical 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) 26 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 and six months ended January 31, 1996 and 1997. *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 Six Months Ended January 31, January 31, ------------------------ ------------------------ 1996 1997 1996 1997 --------- --------- --------- --------- PRIMARY INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 17,938 18,639 17,663 18,510 ========= ========= ========= ========= Primary income per share $ .07 $ .35 $ .17 $ .63 ========= ========= ========= ========= FULLY DILUTED INCOME PER SHARE: Weighted average shares of common stock outstanding (1) 17,938 18,639 17,663 18,510 Shares issuable from assumed conversion of: Warrants 80 79 46 126 Stock options (1) 16 341 8 358 --------- --------- --------- --------- Weighted average shares of common stock outstanding, as adjusted 18,034 19,059 17,717 18,994 ========= ========= ========= ========= Fully diluted income per share $ .07(2) $ .34(2) $ .17(2) $ .61(2) ========= ========= ========= ========= NET INCOME FOR PRIMARY AND FULLY DILUTED COMPUTATION: Net income (3) $ 1,269 $ 6,507 $ 2,959 $ 11,675 ========= ========= ========= =========
- ------------------ (1) Weighted average shares of common stock outstanding and shares issuable from the assumed conversion of stock options for all periods have been restated to include Exchangeable Shares and VES options (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%. (3) As combined - See Note 2 of Notes to the Consolidated Financial Statement. 23 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 AND SIX MONTHS ENDED JANUARY, 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 1000 6-MOS JUL-31-1997 AUG-01-1996 JAN-31-1997 15,523 0 105,645 505 2,126 129,858 197,682 102,668 260,458 62,058 75,186 0 0 161 120,924 260,458 0 167,096 0 126,302 23,775 0 3,230 13,789 2,919 0 0 0 0 11,675 .63 .61
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