-----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, Lc5Ajxw66zajWKLKYL8XFi8VnAs9POLzCOj8KROVNmZ4gZlTJdlMJLXO9rEU+pDm 4TX5OTmmrVUjYiLalLHDiA== 0000950129-98-001050.txt : 19980317 0000950129-98-001050.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950129-98-001050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980316 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: SEC FILE NUMBER: 001-07427 FILM NUMBER: 98565948 BUSINESS ADDRESS: STREET 1: 3701 KIRBY DR STREET 2: STE 112 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7135128300 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 1/31/98 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, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-7427 VERITAS DGC INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0343152 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 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, 1998 was 22,539,446 (including 1,757,588 Veritas Energy Services Inc. exchangeable shares which are identical to the Common Stock in all material respects). ================================================================================ 2 VERITAS DGC INC. AND SUBSIDIARIES INDEX FORM 10-Q - --------------------------------------------------------------------------------
Page Number ----------------- PART I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - For the Three and Six Months Ended January 31, 1997 and 1998 1 Consolidated Balance Sheets - July 31, 1997 and January 31, 1998 2 Consolidated Statements of Cash Flows - For the Six Months Ended January 31, 1997 and 1998 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. Other Information Item 2. Changes in Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 16
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (In thousands, except per share amounts)
Three Months Ended Six Months Ended January 31, January 31, ----------------------- ------------------------ 1997 1998 1997 1998 -------- --------- --------- --------- REVENUES $ 90,691 $ 123,569 $ 167,096 $ 265,755 COSTS AND EXPENSES: Cost of services 67,982 80,804 126,302 174,057 Depreciation and amortization 9,828 12,950 18,520 25,464 Selling, general and administrative 2,432 4,254 4,382 8,793 Other (income) expense: Interest 1,967 2,018 3,230 4,052 Merger related costs 597 Other 532 (730) 276 (1,038) -------- --------- --------- --------- Total costs and expenses 82,741 99,296 153,307 211,328 -------- --------- --------- --------- Income before provision for income taxes and equity in (earnings) loss of joint venture 7,950 24,273 13,789 54,427 Provision for income taxes 1,681 6,505 2,919 16,154 Equity in (earnings) loss of joint venture (238) 91 (805) (723) -------- --------- --------- --------- NET INCOME $ 6,507 $ 17,677 $ 11,675 $ 38,996 ======== ========= ========= ========= PER SHARE: Earnings per common share $ .35 $ .79 $ .63 $ 1.74 ======== ========= ========= ========= Weighted average common shares 18,639 22,513 18,510 22,473 ======== ========= ========= ========= Earnings per common share - assuming dilution $ .34 $ .76 $ .61 $ 1.68 ======== ========= ========= ========= Weighted average common shares - assuming dilution 19,059 23,214 18,994 23,203 ======== ========= ========= =========
See Notes to Consolidated Financial Statements 1 4 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for par value and number of shares)
July 31, January 31, 1997 1998 --------- --------- (Unaudited) ASSETS Current assets: Cash and short-term investments $ 71,177 $ 71,210 Restricted cash investments 550 563 Accounts and notes receivable (net of allowance for doubtful accounts: July $646; January $1,260) 120,946 164,324 Materials and supplies inventory 2,333 3,015 Prepayments and other 10,429 12,193 --------- --------- Total current assets 205,435 251,305 Property and equipment: Seismic equipment 156,264 172,909 Data processing equipment 54,516 63,438 Seismic ship 5,672 Leasehold improvements and other 29,978 34,017 --------- --------- Total 240,758 276,036 Less accumulated depreciation 108,004 128,041 --------- --------- Property and equipment - net 132,754 147,995 Multi-client data library 20,904 25,231 Investment in and advances to joint venture 2,908 3,110 Goodwill (net of accumulated amortization: July $2,725; January $2,979) 3,163 2,909 Deferred tax asset 6,385 4,287 Other assets 9,712 10,467 --------- --------- Total $ 381,261 $ 445,304 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 383 $ 344 Accounts payable - trade 39,007 38,513 Accrued interest 2,188 2,190 Other accrued liabilities 38,669 57,368 Income taxes payable 3,118 6,733 --------- --------- Total current liabilities 83,365 105,148 Non-current liabilities: Long-term debt - less current maturities 75,588 75,407 Other non-current liabilities 1,007 267 --------- --------- Total non-current liabilities 76,595 75,674 Stockholders' equity: Preferred stock, $.01 par value; authorized:1,000,000 shares; none issued Common stock, $.01 par value; authorized:40,000,000 shares; issued: 19,982,040 and 20,672,212 shares (excluding 2,367,071 and 1,840,788 Exchangeable Shares) at July and January, respectively 200 206 Additional paid-in capital 194,764 200,632 Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 27,400 66,396 Cumulative foreign currency translation adjustment (1,063) (2,752) --------- --------- Total stockholders' equity 221,301 264,482 ========= ========= Total $ 381,261 $ 445,304 ========= =========
See Notes to Consolidated Financial Statements 2 5 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars)
Six Months Ended January 31, ---------------------- 1997 1998 -------- -------- OPERATING ACTIVITIES: Net income $ 11,675 $ 38,996 Non-cash items included in net income: Depreciation and amortization 18,520 25,464 Loss on disposition of property and equipment 439 433 Equity in earnings of 50% or less-owned companies and joint ventures (805) (723) Write-down of multi-client data library to market 767 254 Change in operating assets/liabilities: Accounts and notes receivable (39,693) (43,378) Materials and supplies inventory (467) (682) Prepayments and other 1,667 (1,764) Multi-client data library (2,278) (4,581) Other 2,319 (884) Accounts payable - trade (1,420) (2,937) Accrued interest 1,876 2 Other accrued liabilities 7,773 18,699 Income taxes payable 1,319 10,710 Other non-current liabilities 36 (975) -------- -------- Total cash provided by operating activities 1,728 38,634 FINANCING ACTIVITIES: Borrowings from senior notes 75,000 Debt issue costs (2,765) Payments of secured term loans (6,000) Net payments under credit agreement (11,458) Borrowings from long-term debt 781 Payments of long-term debt (29,289) (220) Net proceeds from sale of common stock 3,214 1,112 -------- -------- Total cash provided by financing activities 29,483 892 INVESTING ACTIVITIES: Increase in restricted cash investments (210) (13) Decrease in investment in and advances to joint venture 889 521 Purchase of property and equipment (27,406) (38,494) Sale of property and equipment 699 53 -------- -------- Total cash used by investing activities (26,028) (37,933) Currency (gain) loss on foreign cash 268 (1,560) -------- -------- Change in cash and cash equivalents 5,451 33 Beginning cash and cash equivalents balance 10,072 71,177 -------- -------- Ending cash and cash equivalents balance $ 15,523 $ 71,210 ======== ========
See Notes to Consolidated Financial Statements 3 6 VERITAS DGC INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars)
Six Months Ended January 31, ------------------- 1997 1998 ------- ------- SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase in property and equipment for: Equipment purchase obligations $ 5,542 Accounts payable - trade 2,453 $2,443 Utilization of net operating losses existing prior to the quasi-reorganization resulting in an increase (decrease) in: Deferred tax asset valuation allowance (4,762) Additional paid-in capital 4,762 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest - Senior notes 3,656 Revolving credit agreement 205 Secured term loans 274 Equipment purchase obligations 748 37 Other 150 277 Income taxes 1,333 6,200
See Notes to Consolidated Financial Statements 4 7 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 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 January 31, 1998, and the results of its operations and its cash flows for the three and six months ended January 31, 1997 and 1998. The results of operations for any interim period are not necessarily indicative of the results to be expected for a full year. 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. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement requires disclosure in both interim and annual reporting of the reporting period's comprehensive income (changes in equity from non-owner sources), net of the related tax effect, on the face of the consolidated statement of income, consolidated statement of changes in stockholders' equity or in a separate statement of comprehensive income and the accumulated balance of other comprehensive income (comprehensive income excluding net income) as a separate component in the stockholders' equity section of the consolidated balance sheet. Classifications included in the accumulated balance may be disclosed on the face of the consolidated balance sheet, statement of changes in stockholders' equity or in notes to the consolidated financial statements. The Company's sources of comprehensive income include net income and cumulative foreign currency translation adjustments. The Company will be required to implement this statement in fiscal year 1999. Management has not completed its assessment of how it will present the required information. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which will supersede SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." It will require the Company to disclose certain financial information in both annual and interim reporting about "operating segments" which are components of a company that are evaluated regularly by management in deciding how to allocate its resources and in assessing its performance. It also requires disclosure about the countries from which the Company derives its revenues and in which it employs its long-lived assets. Major customers will continue to be disclosed. The Company will be required to implement this statement in fiscal year 1999. Management has not completed its assessment of how the adoption of this statement will affect its existing segment disclosures. 5 8 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 2. INVESTMENT IN INDONESIAN JOINT VENTURE Summarized financial information for the Company's 80% owned Indonesian joint venture (P.T. Digicon Mega Pratama), which is accounted for under the equity method due to provisions in the joint venture agreement that give minority shareholders the right to exercise control, is as follows:
July 31, January 31, 1997 1998 --------- -------- (In thousands of dollars) Current assets $ 3,697 $ 3,331 Property and equipment, net 60 174 Multi-client data library 228 108 -------- -------- Total assets $ 3,985 $ 3,613 ======== ======== Current liabilities $ 1,077 $ 503 Advances from affiliates 14,784 14,263 Stockholders' deficit: Common stock 2,576 2,576 Accumulated deficit (14,452) (13,729) -------- -------- Total stockholders' deficit (11,876) (11,153) -------- -------- Total liabilities and stockholders' deficit $ 3,985 $ 3,613 ======== ========
Three Months Ended Six Months Ended January 31, January 31, ---------------- -------------------- 1997 1998 1997 1998 ----- ----- ------- ------- (In thousands of dollars) Revenues $ 940 $ 355 $ 4,236 $ 1,804 Cost and expenses: Cost of services 679 576 3,044 1,243 Depreciation and amortization 102 80 390 158 Other income (4) (210) (3) (320) ----- ----- ------- ------- Total 777 446 3,431 1,081 ----- ----- ------- ------- Income (loss) before benefit from income taxes 163 (91) 805 723 Benefit from income taxes (75) ----- ----- ------- ------- Net income (loss) $ 238 $ (91) $ 805 $ 723 ===== ===== ======= =======
6 9 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 3. LONG-TERM DEBT The Company's long-term debt is as follows:
July 31, January 31, 1997 1998 ------- ------- (In thousands of dollars) Senior notes due October 2003, at 9 3/4% $75,000 $75,000 Equipment purchase obligations maturing through September 2000, at a weighted average rate of 9.29% at January 31, 1998 971 751 ------- ------- Total 75,971 75,751 Less current maturities 383 344 ------- ------- Due after one year $75,588 $75,407 ======= =======
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 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 Company maintains a revolving credit agreement which matures in July 1998 with a commercial bank and provides advances up to $25.0 million of which $20.0 million are secured by substantially all of the receivables of the Company. Advances bear interest, at the Company's election, at LIBOR plus two percent or prime rate and are defined 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. 4. OTHER ACCRUED LIABILITIES Other accrued liabilities included $8.3 million and $7.2 million of accrued payroll and benefits and $14.3 million and $30.8 million of deferred revenues as of July 31, 1997 and January 31, 1998, respectively. 5. EMPLOYEE STOCK PURCHASE PLAN On November 1, 1997, the Company initiated a noncompensatory employee stock purchase plan for up to 500,0000 shares of common stock. Participation is voluntary and substantially all full-time employees meeting limited eligibility requirements may participate. Contributions are made through payroll deductions and may not be less than 1% or more than 15% of the participant's base pay as defined. Options are deemed to be granted on the first day and exercised on the last day of the fiscal quarter at a price which is the lower of 85% of the market price on the first or last day of the fiscal quarter. 7 10 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 6. OTHER COSTS AND EXPENSES Other costs and expenses consist of the following:
Three Months Ended Six Months Ended January 31, January 31, ------------------- ------------------- 1997 1998 1997 1998 ----- ------- ----- ------- (In thousands of dollars) Interest income $(283) $(1,066) $(378) $(2,140) Net loss on disposition of property and equipment 215 239 439 433 Net foreign currency exchange losses 619 259 224 854 Other (19) (162) (9) (185) ----- ------- ----- ------- Total $ 532 $ (730) $ 276 $(1,038) ===== ======= ===== =======
7. EARNINGS PER COMMON SHARE Earnings per common share and earnings per common share-assuming dilution are computed as follows:
Three Months Ended Six Months Ended January 31, January 31, -------------------- -------------------- 1997 1998 1997 1998 ------- ------- ------- ------- (In thousands, except per share amounts) Net income $ 6,507 $17,677 $11,675 $38,996 ======= ======= ======= ======= Weighted average common shares 18,639 22,513 18,510 22,473 ======= ======= ======= ======= Earnings per common share $ .35 $ .79 $ .63 $ 1.74 ======= ======= ======= ======= Weighted average common shares - assuming dilution: Weighted average common shares 18,639 22,513 18,510 22,473 Shares issuable from assumed conversion of: Options 341 701 358 711 Warrants 79 126 19 ------- ------- ------- ------- Total 19,059 23,214 18,994 23,203 ======= ======= ======= ======= Earnings per common share - assuming dilution $ .34 $ .76 $ .61 $ 1.68 ======= ======= ======= =======
Exchangeable Stock issued in the business combination between Veritas DGC Inc., formerly Digicon Inc., and Veritas Energy Services Inc. is included in both computations. Options to purchase 49,461 common shares at exercise prices ranging from $38 1/8 to $45 5/16 and expiring March 2007 have been excluded from the computation assuming dilution for the three and six months ended January 31, 1998 because the options' exercise prices exceeded the average market price of the underlying common shares. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors which are more fully described in other reports filed with the Securities and Exchange Commission and include changes in market conditions in the oil and gas industry as well as declines in prices of oil and gas. RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 1998 COMPARED WITH THREE MONTHS ENDED JANUARY 31, 1997 Revenues. Revenues increased 36% from $90.7 million to $123.6 million during the current quarter. Increases were recorded by all service groups; however, marine acquisition revenues showed the largest increase of 95% from $12.9 million to $25.2 million primarily due to additional streamer capacity resulting from the upgrade to Syntron equipment in the prior fiscal year and the increase in demand for and higher prefunding commitments on multi-client surveys performed. Multi-client data sales increased 49% from $16.2 million to $24.2 million due to expanding customer interest in the Gulf of Mexico deepwater and sub-salt areas. Over the past two years, as oil and gas companies have moved toward multi-client surveys to reduce finding costs in these areas, the Company has significantly increased its data library inventory. Data processing revenues increased 26% from $18.1 million to $22.8 million due to increased market activity, increased demand for computer intensive processes, such as prestack time and depth migration, and increased demand for processing the larger volumes of data acquired in three dimensional surveys. The Company has substantially upgraded its processing centers, including the addition of a NEC supercomputer in the U.K. in August 1997, to meet this increased demand. Land and transition zone acquisition revenues increased 18% from $43.5 million to $51.4 million as a result of firm prices, additional recording capacity and operating efficiencies from upgraded and standardized equipment. Operating Expenses. Costs of services increased 19% from $68.0 million to $80.8 million, but as a percent of revenues decreased from 75% to 65%. The improvement in operating margins is mainly attributable to the significant sales of multi-client data surveys that generally have higher margins. Data processing operating margins also improved as a result of an increase in capacity of more efficient computers and software. Marine margins were consistent and land and transition zone margins decreased slightly as a result of an unusually warm winter season in Canada. Depreciation and Amortization. Depreciation and amortization expense increased 32% from $9.8 million to $13.0 million due to capital expenditures of $137.0 million over the last eighteen months. Selling, General and Administrative. Selling, general and administrative expenses increased 75% from $2.4 million to $4.3 million, resulting primarily from costs incurred in implementing new administrative and accounting systems and pursuing a more aggressive marketing strategy. Other Income. Other income increased $1.3 million primarily from interest income earned on the higher average cash balances maintained by the Company. Income Taxes. Provision for income taxes increased from $1.7 million to $6.5 million as a result of the increased profitability of the Company. Equity in earnings. Equity in earnings is related to the Indonesian joint venture. More marine acquisition surveys were performed in the prior year that increased profitability of the joint venture. 9 12 SIX MONTHS ENDED JANUARY 31, 1998 COMPARED WITH SIX MONTHS ENDED JANUARY 31, 1997 Revenues. Revenues increased 59% from $167.1 million to $265.8 million during the current period. Although all service groups improved, multi-client data sales showed the largest increase at 226% from $20.4 million to $66.5 million. Sales of Gulf of Mexico data were the largest contributor. Marine acquisition revenues increased 49% from $29.2 million to $43.5 million primarily due to additional streamer capacity and an increase in demand. Data processing revenues increased 35% from $33.5 million to $45.1 million due to increases in market activity, computer intensive processes and capacity. Land and transition zone acquisition revenues increased 32% from $84.0 million to $110.7 million as a result of firm prices, additional recording capacity and operating efficiencies from upgraded and standardized equipment. Operating Expenses. Costs of services increased 38% from $126.3 million to $174.1 million, but as a percent of revenues decreased from 76% to 66%. The improvement in operating margins is mainly attributable to significant sales of multi-client data surveys. Data processing operating margins also showed improvement as a result of more efficient equipment. Marine and land and transition zone margins remained consistent. Depreciation and Amortization. Depreciation and amortization expense increased 37% from $18.5 million to $25.5 million due to the large increase in capital expenditures over the past eighteen months. Selling, General and Administrative. Selling, general and administrative expenses increased 101% from $4.4 million to $8.8 million resulting primarily from costs incurred in implementing new administrative and accounting systems and pursuing a more aggressive marketing strategy. Interest. Interest expense increased slightly from $3.2 million to $4.1 million due to the issuance of $75.0 million of senior notes in late October 1996 which replaced approximately $40.0 million in other debt. Other Income. Other income increased $1.3 million primarily from interest income earned on the higher average cash balances maintained by the Company. Income Taxes. Provision for income taxes increased from $2.9 million to $16.2 million as a result of the increased profitability of the Company. This increase was offset by a benefit of $7.2 million, recorded to recognize the expected future utilization of tax net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES The Company's internal sources of liquidity are cash, short-term investments and cash flow from operations. External sources include the unutilized portion of a revolving credit facility, public financings, equipment financing and trade credit. 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 52% of revenues for the quarter ended January 31, 1998 were attributable to the Company's 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, partially funded multi-client data surveys generally require greater amounts of working capital than contract work. Depending on the timing of future sales of the data and the collection of the proceeds from such sales, the Company's liquidity will be affected; however, the Company believes that these non-exclusive surveys have good long-term sales, earnings and cash flow potential. The Company's capital expenditure program for 1998 is $104.0 million and includes expenditures of $26.0 million to maintain or replace the Company's current operating equipment and $78.0 million to 10 13 expand capacity, including the purchase of a marine seismic vessel previously chartered and the outfitting of a new marine seismic vessel. The Company plans to spend $6.2 million in fiscal 1998 for research and development. In October 1996, the Company completed a $75.0 million public offering of Senior Notes due in October 2003 (the "Senior Notes"). The net proceeds from the Senior Notes were used to retire outstanding indebtedness of the Company and fund a portion of the Company's capital expenditures in fiscal 1997. The indenture relating to the Senior Notes (the "Indenture") contains certain covenants, including covenants that limit the Company's ability to, among other things, incur additional debt, pay dividends, and complete mergers, acquisitions and sales of assets. The Company is in compliance with all covenants of the agreement at January 31, 1998. Upon a change in 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. In July 1997, the Company completed a public offering (the "Offering") of 3,450,000 shares of common stock . A portion of the net proceeds from the Offering of $76.4 million was used for 1997 and 1998 capital expenditures and the remainder will be used for other general corporate purposes, including working capital, possible repurchases of outstanding Senior Notes and possible acquisitions. No repurchases will be made of outstanding Senior Notes, except at prices which are, at the time of any such repurchase, regarded by the Company to be attractive. Accordingly, there can be no assurance that any such repurchases will be made. While the Company regularly evaluates opportunities to acquire complementary businesses, it has no present agreements or commitments with respect to possible acquisitions, and no estimate can be made as to the amount of net proceeds which ultimately may be used for acquisitions. The Company maintains a $25.0 million revolving credit facility, as amended (the "Credit Facility"), with a commercial bank which will mature in July 1998. Advances up to $20.0 million under the Credit Facility are secured by substantially all of the Company's receivables. All advances bear interest, at the Company's election, at LIBOR plus two percent or prime rate and are defined 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 prohibit the payment of cash dividends and limit, among other things, the Company's right to create indebtedness and make capital expenditures over a certain amount 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 is in compliance with all covenants of the agreement and has no outstanding advances at January 31, 1998. Since the Company's quasi-reorganization with respect to Digicon Inc. on July 31, 1991, the tax benefits of net operating loss carryforwards existing at the date of the quasi-reorganization have been recognized through a direct addition to paid-in capital, when realization is more likely than not. Additionally, the utilization of the net operating loss carryforwards existing at the date of the quasi-reorganization is subject to certain limitations. During the six months ended January 31, 1998 the Company recognized $4.8 million related to these benefits, due to the increased profitability of the Company during the current fiscal year and anticipated profitability in future fiscal years. The Company is currently assessing the impact of the year 2000 issue relating to computer systems but does not expect future results to be affected. 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 outstanding indebtedness. The Company anticipates that cash and short-term investments, net proceeds from the Offering, cash flow generated from operations and borrowings permitted under the Indenture and Credit Facility will provide sufficient liquidity to fund these requirements through fiscal 1998. 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, 11 14 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 assurance 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. 12 15 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES c) UNREGISTERED SECURITIES On November 10 and December 12, 1997, the Company issued 5,500 and 3,525 shares of its common stock, respectively, to certain managers of the Company in exchange for services to be rendered over the following three years. Such issuance of common stock was exempt from registration pursuant to section 4(2) of the Securities Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 9, 1997 at the Annual Meeting of Stockholders of Veritas DGC Inc., stockholders voted: 1. To elect each of the ten directors nominated for the board of directors as follows:
FOR AGAINST ---------- -------- Clayton P. Cormier 19,507,417 807,095 Ralph M. Eeson 19,724,817 589,695 Lawrence C. Fichtner 19,727,857 586,655 James R. Gibbs 19,727,637 586,875 Steven J. Gilbert 19,727,967 586,545 Stephen J. Ludlow 19,727,967 586,545 Brian F. MacNeill 19,727,967 586,545 David B. Robson 19,727,757 586,755 Douglas B. Thompson 19,510,357 804,155 Jack C. Threet 19,507,357 807,155
2. Upon a proposal to adopt a 1997 Employee Stock Purchase Plan which allows qualifying employees to purchase specified amounts of the Company's stock at a discount from market price. Votes cast for the above matter were 16,658,972; votes against the above matter were 601,242. There were 109,795 abstentions and 2,944,503 broker non-votes. and 3. Upon the proposed amendment to the Company's Amended and Restated 1992 Employee Nonqualified Stock Option Plan which would increase the number of shares of common stock which may be issued or covered by options by 1,041,667 shares. Votes cast for the above matter were 11,070,584; votes against the above matter were 6,188,436. There were 110,989 abstentions and 2,944,503 broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS FILED WITH THIS REPORT: Exhibit ---------- 2) Combination Agreement dated as of May 10, 1996, between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 2.1 of Digicon Inc.'s Current Report on Form 8-K dated May 10, 1996 is incorporated herein by reference.) 13 16 3-A) Restated Certificate of Incorporation with amendments of Digicon Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference). 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.) 4-D) Rights Agreement between Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27, 1997 is incorporated herein by reference.) 10-A) Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-B) Amended and Restated 1992 Non-Employee Director Stock Option Plan. (Exhibit 4.2 to Veritas DGC Inc.'s Registration Statement No. 333-41829 dated December 10, 1997 is incorporated herein by reference.) 10-C) Second Amended and Restated 1992 Employee Nonqualified Stock Option Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-41829 dated December 10, 1997 is incorporated herein by reference.) 10-D) Support Agreement dated August 30, 1996, between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K, dated August 30, 1996 is incorporated herein by reference.) 10-E) 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") (Exhibit 10-G of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996 is incorporated herein by reference.) 10-F) Letter dated September 27, 1996, from Wells Fargo Bank (Texas), National Association, agreeing to amend the Credit Agreement. (Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996 is incorporated herein by reference.) 10-G) Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 13 17 10-H) Letter dated May 28, 1997, from Wells Fargo Bank (Texas), National Association, agreeing to amend the Credit Agreement. (Exhibit 10-J to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-I) Severance Agreement between Veritas DGC Inc. and Richard W. McNairy. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-J) Employment Agreement executed by David B. Robson. (Exhibit 10-L to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-K) Employment Agreement executed by Lawrence C. Fichtner. (Exhibit 10-M to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-L) Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-M) Restricted Stock Agreement dated April 1, 1997 between Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-N) 1997 Employee Stock Purchase Plan (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-38377 dated October 21, 1997 is incorporated herein by reference.) *27) Financial Data Schedule. * Filed herewith b) REPORTS ON FORM 8-K There were no reports on Form 8-K during the quarter ended January 31, 1998. 14 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on the 13th day of March, 1998. VERITAS DGC INC. By: /s/ David B. Robson --------------------------------- DAVID B. ROBSON Chairman of the Board and Chief Executive Officer /s/ Anthony Tripodo --------------------------------- ANTHONY TRIPODO Executive Vice President, Chief Financial and Accounting Officer and Treasurer 15 19 INDEX TO EXHIBITS Exhibit ---------- 2) Combination Agreement dated as of May 10, 1996, between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 2.1 of Digicon Inc.'s Current Report on Form 8-K dated May 10, 1996 is incorporated herein by reference.) 3-A) Restated Certificate of Incorporation with amendments of Digicon Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference). 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.) 4-D) Rights Agreement between Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27, 1997 is incorporated herein by reference.) 10-A) Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-B) Amended and Restated 1992 Non-Employee Director Stock Option Plan. (Exhibit 4.2 to Veritas DGC Inc.'s Registration Statement No. 333-41829 dated December 10, 1997 is incorporated herein by reference.) 10-C) Second Amended and Restated 1992 Employee Nonqualified Stock Option Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-41829 dated December 10, 1997 is incorporated herein by reference.) 10-D) Support Agreement dated August 30, 1996, between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K, dated August 30, 1996 is incorporated herein by reference.) 20 10-E) 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") (Exhibit 10-G of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996 is incorporated herein by reference.) 10-F) Letter dated September 27, 1996, from Wells Fargo Bank (Texas), National Association, agreeing to amend the Credit Agreement. (Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No. 333-12481, dated October 2, 1996 is incorporated herein by reference.) 10-G) Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-H) Letter dated May 28, 1997, from Wells Fargo Bank (Texas), National Association, agreeing to amend the Credit Agreement. (Exhibit 10-J to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-I) Severance Agreement between Veritas DGC Inc. and Richard W. McNairy. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-J) Employment Agreement executed by David B. Robson. (Exhibit 10-L to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-K) Employment Agreement executed by Lawrence C. Fichtner. (Exhibit 10-M to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-L) Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-M) Restricted Stock Agreement dated April 1, 1997 between Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-N) 1997 Employee Stock Purchase Plan (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-38377 dated October 21, 1997 is incorporated herein by reference.) *27) Financial Data Schedule. * Filed herewith EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) VERITAS DGC INC.'S FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q. 1,000 6-MOS JUL-31-1998 AUG-01-1997 JAN-31-1998 71,210 0 164,324 1,260 3,015 251,305 276,036 128,041 445,304 105,148 75,407 0 0 206 264,276 445,304 0 265,755 0 174,057 37,271 0 4,052 54,427 16,154 38,996 0 0 0 38,996 1.74 1.68
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