-----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, Gf8vTbHU9vTiohydEW6Sj5TN++snPRF/b3TJX9SO0hfTyXJvnVf4nzXnws4C9yEe /cO8YicuzdN2t1bA/ywA+w== 0000950129-98-002521.txt : 19980615 0000950129-98-002521.hdr.sgml : 19980615 ACCESSION NUMBER: 0000950129-98-002521 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980612 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: 98646971 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. - APRIL 30, 1998 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 APRIL 30, 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 (I.R.S. Employer Identification No.) incorporation or 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 May 31, 1998 was 22,730,051 (including 1,511,955 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 Nine Months Ended April 30, 1997 and 1998 1 Consolidated Balance Sheets - July 31, 1997 and April 30, 1998 2 Consolidated Statements of Cash Flows - For the Nine Months Ended April 30, 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 6. Exhibits and Reports on Form 8-K 13 Signatures 15
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 Nine Months Ended April 30, April 30, ----------------------------- ------------------------------ 1997 1998 1997 1998 ------------ ------------ ------------ ------------ REVENUES $ 86,843 $ 122,810 $ 253,939 $ 388,565 COSTS AND EXPENSES: Cost of services 63,344 75,381 189,646 249,438 Depreciation and amortization 10,142 14,385 28,662 39,849 Selling, general and administrative 3,221 5,405 7,603 14,198 Other (income) expense: Interest 2,104 2,009 5,334 6,061 Merger related costs 597 Other 535 (1,009) 811 (2,047) ------------ ------------ ------------ ------------ Total costs and expenses 79,346 96,171 232,653 307,499 ------------ ------------ ------------ ------------ Income before provision for income taxes and equity 7,497 26,639 21,286 81,066 in (earnings) loss of joint venture Provision for income taxes 1,341 11,055 4,260 27,209 Equity in (earnings) loss of joint venture 70 (478) (735) (1,201) ------------ ------------ ------------ ------------ NET INCOME $ 6,086 $ 16,062 $ 17,761 $ 55,058 ============ ============ ============ ============ PER SHARE: Earnings per common share $ .32 $ .71 $ .95 $ 2.44 ============ ============ ============ ============ Weighted average common shares 18,819 22,645 18,611 22,535 ============ ============ ============ ============ Earnings per common share - assuming dilution $ .32 $ .69 $ .93 $ 2.37 ============ ============ ============ ============ Weighted average common shares - assuming dilution 19,152 23,347 19,048 23,273 ============ ============ ============ ============
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, April 30, 1997 1998 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and short-term investments $ 71,177 $ 92,511 Restricted cash investments 550 571 Accounts and notes receivable (net of allowance for doubtful accounts: July $646; April $1,232) 120,946 143,520 Materials and supplies inventory 2,333 3,498 Prepayments and other 10,429 17,325 ------------ ------------ Total current assets 205,435 257,425 Property and equipment: Seismic equipment 156,264 177,822 Data processing equipment 54,516 66,652 Seismic ship 6,636 Leasehold improvements and other 29,978 43,593 ------------ ------------ Total 240,758 294,703 Less accumulated depreciation 108,004 141,569 ------------ ------------ Property and equipment - net 132,754 153,134 Multi-client data library 20,904 34,677 Investment in and advances to joint venture 2,908 3,879 Goodwill (net of accumulated amortization: July $2,725; April $3,107) 3,163 2,781 Deferred tax asset 6,385 14,266 Other assets 9,712 8,472 ------------ ------------ Total $ 381,261 $ 474,634 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 383 $ 292 Accounts payable - trade 39,007 45,200 Accrued interest 2,188 385 Other accrued liabilities 38,669 57,377 Income taxes payable 791 2,502 ------------ ------------ Total current liabilities 81,038 105,756 Non-current liabilities: Long-term debt - less current maturities 75,588 75,340 Other non-current liabilities 3,334 9,633 ------------ ------------ Total non-current liabilities 78,922 84,973 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: 200 211 19,982,040 and 21,184,837 shares (excluding 2,367,071 and 1,526,183 Exchangeable Shares) at July and April, respectively Additional paid-in capital 194,764 203,039 Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 27,400 82,458 Cumulative foreign currency translation adjustment (1,063) (1,803) ------------ ------------ Total stockholders' equity 221,301 283,905 ============ ============ Total $ 381,261 $ 474,634 ============ ============
See Notes to Consolidated Financial Statements 2 5 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands of dollars)
Nine Months Ended April 30, ------------------------------ 1997 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $ 17,761 $ 55,058 Non-cash items included in net income: Depreciation and amortization 28,662 39,849 Loss on disposition of property and equipment 783 464 Equity in earnings of 50% or less-owned companies and joint ventures (735) (1,201) Write-down of multi-client data library to market 989 460 Change in operating assets/liabilities: Accounts and notes receivable (35,342) (22,574) Materials and supplies inventory (882) (1,165) Prepayments and other (1,107) (6,896) Multi-client data library (2,611) (14,233) Deferred tax asset (3,119) Other (1,588) 1,111 Accounts payable - trade 9,303 3,750 Accrued interest 68 (1,803) Other accrued liabilities 10,675 18,708 Income taxes payable 561 1,711 Other non-current liabilities 1,010 6,299 ------------ ------------ Total cash provided by operating activities 27,547 76,419 FINANCING ACTIVITIES: Borrowings from senior notes 75,000 Debt issue costs (2,765) Payments of secured term loans (10,072) Net payments under credit agreement (8,118) Borrowings from long-term debt 781 Payments of long-term debt (25,584) (339) Net proceeds from sale of common stock 3,691 3,524 ------------ ------------ Total cash provided by financing activities 32,933 3,185 INVESTING ACTIVITIES: Increase in restricted cash investments (215) (21) Decrease in investment in and advances to joint venture 1,428 230 Purchase of property and equipment (59,063) (57,921) Sale of property and equipment 812 53 ------------ ------------ Total cash used by investing activities (57,038) (57,659) Currency (gain) loss on foreign cash 617 (611) ------------ ------------ Change in cash and cash equivalents 4,059 21,334 Beginning cash and cash equivalents balance 10,072 71,177 ------------ ------------ Ending cash and cash equivalents balance $ 14,131 $ 92,511 ============ ============
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)
Nine Months Ended April 30, -------------------------- 1997 1998 ------------ ------------ SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase in property and equipment for: Equipment purchase obligations $ 6,388 Accounts payable - trade 7,705 $ 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 3,494 7,622 Revolving credit agreement 236 Secured term loans 274 Equipment purchase obligations 755 91 Other 278 277 Income taxes 1,589 21,433
See Notes to Consolidated Financial Statements 4 7 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 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 April 30, 1998, and the results of its operations and its cash flows for the three and nine months ended April 30, 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. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which will supersede the disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers' 5 8 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998 Accounting for Postretirement Benefits Other Than Pensions." This statement addresses disclosures only and will require the Company to provide a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets in addition to disclosures already presented. The Company will be required to implement this statement in fiscal year 1999. RECLASSIFICATION OF PRIOR YEAR BALANCES Certain prior year balances have been reclassified for consistent presentation. 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, April 30, 1997 1998 ------------ ------------ (In thousands of dollars) Current assets $ 3,697 $ 4,179 Property and equipment, net 60 169 Multi-client data library 228 48 ------------ ------------ Total assets $ 3,985 $ 4,396 ============ ============ Current liabilities $ 1,077 $ 517 Advances from affiliates 14,784 14,554 Stockholders' deficit: Common stock 2,576 2,576 Accumulated deficit (14,452) (13,251) ------------ ------------ Total stockholders' deficit (11,876) (10,675) ------------ ------------ Total liabilities and stockholders' deficit $ 3,985 $ 4,396 ============ ============
Three Months Ended Nine Months Ended April 30, April 30, -------------------------- -------------------------- 1997 1998 1997 1998 ---------- ---------- ---------- ---------- (In thousands of dollars) Revenues $ 718 $ 1,163 $ 4,954 $ 2,967 Cost and expenses: Cost of services 717 612 3,761 1,855 Depreciation and amortization 79 61 469 219 Other (income) expense (8) 12 (11) (308) ---------- ---------- ---------- ---------- Total 788 685 4,219 1,766 ---------- ---------- ---------- ---------- Net income (loss) $ (70) $ 478 $ 735 $ 1,201 ========== ========== ========== ==========
6 9 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998 3. LONG-TERM DEBT The Company's long-term debt is as follows:
July 31, April 30, 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 April 30, 1998 971 632 ------------ ------------ Total 75,971 75,632 Less current maturities 383 292 ------------ ------------ Due after one year $ 75,588 $ 75,340 ============ ============
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 $10.7 million of accrued payroll and benefits and $14.3 million and $28.5 million of deferred revenues as of July 31, 1997 and April 30, 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. The participant's option to purchase common stock is deemed to be granted on the first day and exercised on 7 10 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998 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. 6. OTHER COSTS AND EXPENSES Other costs and expenses consist of the following:
Three Months Ended Nine Months Ended April 30, April 30, ------------------------------ ------------------------------ 1997 1998 1997 1998 ------------ ------------ ------------ ------------ (In thousands of dollars) Interest income $ (47) $ (1,263) $ (425) $ (3,403) Net loss on disposition of property and equipment 344 31 783 464 Net foreign currency exchange losses 253 222 477 1,076 Other (15) 1 (24) (184) ------------ ------------ ------------ ------------ Total $ 535 $ (1,009) $ 811 $ (2,047) ============ ============ ============ ============
7. EARNINGS PER COMMON SHARE Earnings per common share and earnings per common share-assuming dilution are computed as follows:
Three Months Ended Nine Months Ended April 30, April 30, ----------------------------- ----------------------------- 1997 1998 1997 1998 ------------ ------------ ------------ ------------ (In thousands, except per share amounts) Net income $ 6,086 $ 16,062 $ 17,761 $ 55,058 ============ ============ ============ ============ Weighted average common shares 18,819 22,645 18,611 22,535 ============ ============ ============ ============ Earnings per common share $ .32 $ .71 $ .95 $ 2.44 ============ ============ ============ ============ Weighted average common shares - assuming dilution: Weighted average common shares 18,819 22,645 18,611 22,535 Shares issuable from assumed conversion of: Options 301 702 342 726 Warrants 32 95 12 ------------ ------------ ------------ ------------ Total 19,152 23,347 19,048 23,273 ============ ============ ============ ============ Earnings per common share - assuming dilution $ .32 $ .69 $ .93 $ 2.37 ============ ============ ============ ============
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 27,802 at exercise prices ranging from $45 5/16 to $54 3/16 and expiring through April 2008 and 41,051 common shares at exercise prices ranging from $40 5/16 to $54 3/16 and expiring through April 2008 have been excluded from the computation assuming dilution for the three and nine months ended April 30, 1998, respectively, 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 APRIL 30, 1998 COMPARED WITH THREE MONTHS ENDED APRIL 30, 1997 Revenues. Revenues increased 41% from $86.8 million to $122.8 million during the current quarter. Increases were recorded by all service groups; however, data library sales showed the largest increase at 178% from $10.7 million to $29.7 million primarily as a result of an increase in demand for multi-client surveys performed in the Gulf of Mexico deepwater and sub-salt areas and in the North Sea. Over the past two years, as oil and gas companies have moved toward multi-client surveys to reduce finding costs, the Company has significantly increased its data library inventory. Land and transition zone acquisition revenues increased 28% from $42.2 million to $54.1 million and was attributable to additional recording capacity, including the purchase of two new crews in Oman and the addition of one crew in South America. These increases were partially offset by a decrease in revenues in Canada as a result of warmer than usual winter weather and an early spring breakup. Data processing revenues increased 15% from $20.4 million to $23.4 million due to increased market activity, increased demand for computer intensive processes, such as prestack time and depth migration and the larger volumes of data acquired in three dimensional surveys. The Company has substantially upgraded its processing centers, including the addition of another NEC supercomputer in August 1997 for use in the U.K. and several multi-noded workstations in the current quarter, to meet this increased demand. Marine revenues increased 16% from $13.5 million to $15.6 million due to expanding customer interest in the Gulf of Mexico multi-client surveys as discussed above. Revenues did not increase as dramatically for this service group due to four vessels being in dry dock for regularly scheduled maintenance at various times throughout the quarter. Operating Expenses. Costs of services increased 19% from $63.3 million to $75.4 million, but as a percent of revenues decreased from 73% to 61%. The improvement in operating margins is mainly attributable to the data library and marine service groups as a result of the significant sales and performance 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. 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 43% from $10.1 million to $14.4 million due to capital expenditures of $156.4 million over the last 21 months. Selling, General and Administrative. Selling, general and administrative expenses increased 69% from $3.2 million to $5.4 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 $1.5 million primarily from interest income earned on the higher average cash balances maintained by the Company. Income Taxes. Provision for income taxes increased from $1.3 million to $11.1 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 current year that increased profitability of the joint venture. 9 12 NINE MONTHS ENDED APRIL 30, 1998 COMPARED WITH NINE MONTHS ENDED APRIL 30, 1997 Revenues. Revenues increased 53% from $253.9 million to $388.6 million during the current period. Although all service groups improved, multi-client data sales showed the largest increase at 209% from $31.1 million to $96.2 million. Sales of Gulf of Mexico data provided the largest increase, but sales from the Company's North Sea and land data libraries also contributed to the increase. Land and transition zone acquisition revenues increased 31% from $126.2 million to $164.8 million as a result of additional recording capacity, including the purchase of two new crews in Oman and the addition of one crew in South America, and operating efficiencies from upgraded and standardized equipment. Warmer than usual winter conditions and an early spring breakup in Canada had a negative impact on these revenues. Marine acquisition revenues increased 38% from $42.7 million to $59.1 million primarily due to additional streamer capacity and an increase in demand, particularly in Gulf of Mexico multi-client data surveys. Data processing revenues increased 27% from $53.9 million to $68.5 million due to increases in market activity, demand for computer intensive processes and capacity to meet this demand. Operating Expenses. Costs of services increased 32% from $189.6 million to $249.4 million, but as a percent of revenues decreased from 75% to 64%. The improvement in operating margins is mainly attributable to the data library and marine service groups as a result of the significant sales and performance of multi-client data surveys. Data processing operating margins also showed improvement as a result of more efficient equipment. Land and transition zone margins remained consistent as a result of the warmer than usual winter in Canada. Depreciation and Amortization. Depreciation and amortization expense increased 39% from $28.7 million to $39.8 million due to the large increase in capital expenditures over the past 21 months. Selling, General and Administrative. Selling, general and administrative expenses increased 87% from $7.6 million to $14.2 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 $5.3 million to $6.1 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 $2.9 million primarily from interest income earned on the higher average cash balances maintained by the Company. Income Taxes. Provision for income taxes increased from $4.3 million to $27.2 million as a result of the increased profitability of the Company. 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 financing, 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 53% of revenues for the quarter ended April 30, 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. 10 13 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 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 April 30, 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 that 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 April 30, 1998. The Company expects to extend or replace the Credit Facility in July 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 nine months ended April 30, 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 the next fiscal year. The Company has prepared a formal plan to address Year 2000 issues as they relate to the Company's business and its operations. In accordance with that plan, the Company has evaluated all internal hardware and software used in its operations. The Company has also identified all external relationships 11 14 and mailed each entity an internally prepared questionnaire addressing their state of readiness regarding Year 2000 issues. Approximately 85% of the questionnaires, which are due to the Company by August 31, 1998, have been returned. The Company has prepared a replacement schedule for hardware and software that is not Year 2000 compliant that has been identified to date. In addition, the Company is preparing a contingency plan to address any unidentified internal or external hardware and software that is not Year 2000 compliant. The Company estimates that it will complete its plan, including remedial actions, by June 30, 1999 and is not aware of any material contingencies or costs that will be incurred in order to be Year 2000 compliant. 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, 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 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.) 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.) 4-E) Form S-8 Restricted Stock Grant Agreement (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-48953 dated March 31, 1998 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.) 13 16 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.) 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 April 30, 1998. 14 17 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 5th day of June, 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 18 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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.) 4-E) Form S-8 Restricted Stock Grant Agreement (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-48953 dated March 31, 1998 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.)
19 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.) 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 VERITAS DGC INC.'S FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q 1,000 9-MOS JUL-31-1998 AUG-01-1997 APR-30-1998 92,511 0 143,520 1,232 3,498 257,425 294,703 141,569 474,634 105,756 75,340 0 0 211 283,694 474,634 0 388,565 0 249,438 58,061 0 6,061 81,066 27,209 55,058 0 0 0 55,058 2.44 2.37
EX-27.1 3 FINANCIAL DATA SCHEDULE - RESTATED
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VERITAS DGC INC.'S FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 30, 1998 (NINE MONTHS ENDED APRIL 30, 1997 RESTATED FOR SFAS NO. 128) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q 1,000 9-MOS JUL-31-1997 AUG-01-1996 APR-30-1997 71,177 0 120,946 646 2,333 205,435 240,758 108,004 381,261 81,038 75,588 0 0 200 221,101 381,261 0 253,939 0 189,646 43,007 0 5,334 21,286 4,260 17,761 0 0 0 17,761 .95 .93
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