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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7427
DIGICON INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3701 KIRBY DRIVE, SUITE #112, HOUSTON, TEXAS 77098
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 526-5611
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT DECEMBER 14, 1995
Common Stock, $.01 par value 11,134,939
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DIGICON INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
October 31, 1995 and July 31, 1995 1
Consolidated Statements of Operations -
For the Three Months Ended October 31, 1995 and 1994 3
Consolidated Statements of Cash Flows -
For the Three Months Ended October 31, 1995 and 1994 4
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
PART II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
October 31, July 31,
1995 1995
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ASSETS (In thousands of dollars)
<S> <C> <C>
Current assets:
Cash $ 3,490 $ 4,209
Restricted cash investments 681 670
Accounts and notes receivable (net of allowance for
doubtful accounts: October, $653; July, $703) 42,632 40,662
Materials and supplies inventory (net of reserves:
October, $66; July, $66) 1,269 1,335
Prepayments and other 6,489 6,619
------------ -------------
Total current assets 54,561 53,495
Property and equipment:
Seismic equipment 56,386 53,615
Data processing equipment 26,620 26,703
Leasehold improvements and other 32,011 29,394
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Total 115,017 109,712
Less accumulated depreciation 63,843 60,874
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Property and equipment - net 51,174 48,838
Proprietary seismic data 29,061 28,444
Goodwill (net of accumulated amortization:
October, $1,273; July, $1,168) 2,972 3,077
Other assets 1,284 1,216
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Total $ 139,052 $ 135,070
============ =============
</TABLE>
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See Notes to Consolidated Financial Statements.
1
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<TABLE>
<CAPTION>
(Unaudited)
October 31, July 31,
1995 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands of dollars)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 10,656 $ 10,915
Accounts payable - trade 18,206 18,875
Accrued interest 399 409
Other accrued liabilities 13,020 14,869
Income taxes payable 1,696 1,097
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Total current liabilities 43,977 46,165
Non-current liabilities:
Long-term debt-less current maturities 26,697 25,243
Deferred credits 3,675 3,675
Other non-current liabilities 1,087 1,105
----------- -----------
Total non-current liabilities 31,459 30,023
Stockholders' equity:
Common stock, $.01 par value; authorized:
20,000,000 shares; issued: 11,134,939 shares 111 111
Additional paid-in capital 71,105 71,895
Accumulated deficit from August 1, 1991 (7,600) (8,352)
Less: Treasury stock, at cost; 858,497 shares (4,772)
----------- -----------
Stockholders' equity 63,616 58,882
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Total $ 139,052 $ 135,070
=========== ===========
</TABLE>
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See Notes to Consolidated Financial Statements.
2
<PAGE> 5
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended October 31,
--------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues $ 38,178 $ 32,000
Costs and expenses:
Operating expenses 30,433 25,008
Depreciation and amortization 3,623 3,393
Selling, general and administrative 1,251 1,106
Interest 1,282 1,170
Equity in loss of 50% or less-
owned companies and joint ventures 361
Other 111 (372)
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Total costs and expenses 36,700 30,666
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Income before provision for
income taxes 1,478 1,334
Provision for income taxes 726 727
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Net income $ 752 $ 607
========== ==========
Per share of common stock:
Income per share of common stock $ .07 $ .06
========== ==========
Weighted average shares (includes
common stock only) 10,584 10,956
========== ==========
Cash dividends None None
========== ==========
</TABLE>
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See Notes to Consolidated Financial Statements.
3
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DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended October 31,
--------------------------------
1995 1994
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(In thousands of dollars)
<S> <C> <C>
Operating activities:
Net income $ 752 $ 607
Non-cash items included in net income:
Depreciation and amortization 3,623 3,393
Amortization of deferred gain on sale/leaseback (60) (200)
(Gain) loss on disposition of property and equipment 137 (349)
Equity in loss of 50% or less-owned
companies and joint ventures 361
Write-down of proprietary seismic data to market 99 99
Restructuring accrual (295)
Change in operating assets/liabilities:
Accounts and notes receivable (1,970) (4,818)
Materials and supplies inventory 66 11
Prepayments and other 130 (845)
Proprietary seismic data (716) (1,859)
Other (84) 122
Accounts payable - trade (1,051) (2,960)
Accrued interest (10) 46
Other accrued liabilities (1,789) 1,727
Income taxes payable 599 163
Other non-current liabilities (18) 88
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Total cash used by operating activities (292) (4,709)
Financing activities:
Borrowings of short-term related party debt 30
Payments of short-term related party debt (1,052)
Payments of long-term debt (1,877) (1,321)
Net borrowings under credit agreements 813 588
Net proceeds from sale of common stock (15)
Net proceeds from sale of treasury stock 3,982
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Total cash provided (used) by financing activities 2,918 (1,770)
</TABLE>
- ---------------
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended October 31,
-------------------------------
1995 1994
------------ -----------
(In thousands of dollars)
<S> <C> <C>
Investing activities:
Purchase of property and equipment $ (3,488) $ (746)
Sale of property and equipment 132 98
Increase in restricted cash investments (11) (424)
Increase in investment in FSU joint ventures (415)
Sale to Syntron, Inc.:
Inventories and technologies 1,630
Property and equipment 1,370
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Total cash provided (used) by investing activities (3,367) 1,513
Currency loss on foreign cash 22 35
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Change in cash and cash equivalents (719) (4,931)
Beginning cash and cash equivalents balance 4,209 8,365
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Ending cash and cash equivalents balance $ 3,490 $ 3,434
============ ============
</TABLE>
- ---------------
See Notes to Consolidated Financial Statements.
5
<PAGE> 8
DIGICON INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended October 31,
-------------------------------
1995 1994
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(In thousands of dollars)
<S> <C> <C>
Schedule of non-cash investing and financing activities:
Increase in property and equipment for:
Equipment purchase obligations $ 2,259 $ 454
Accounts payable - trade 382 893
Increase (decrease) in investment in FSU joint venture for:
Common stock 2,309
Accounts and note receivable from FSU joint venture (409)
Other accrued liabilities 1,233
Long-term debt 245
Sale of inventories, property and equipment, and technologies
to Syntron, Inc. resulting in an increase (decrease) in:
Accounts and notes receivable - deferred credits 1,805
Materials and supplies inventory (2,034)
Other assets - deferred credits receivable 2,307
Accounts payable - trade 957
Other accrued liabilities - deferred gain 1,011
Other non-current liabilities - deferred gain 110
Sale of seismic vessel for increase in:
Accounts and notes receivable 925
Accounts payable - trade 50
Supplemental disclosures of cash flow information:
Cash paid during the three months ended for:
Interest -
Revolving credit agreements 529 397
Secured term loan 121 151
Equipment purchase obligations 392 291
Other 220 276
Income taxes 112 131
</TABLE>
6
<PAGE> 9
DIGICON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPINION OF MANAGEMENT
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of Digicon Inc. and subsidiaries at
October 31, 1995, and the results of its operations and its cash flows
for the three-month periods ended October 31, 1995 and 1994. The
results of operations for any interim period are not necessarily
indicative of the results to be expected for a full year, as such
results could be affected by changes in demand for geophysical
services and products, which is directly related to the level of oil
and gas exploration and development activity. Governmental actions,
foreign currency exchange rate fluctuations, seasonal factors, weather
conditions and equipment problems also could impact future operating
results.
EARNINGS PER SHARE
Weighted average shares and earnings per share for all periods
presented have been restated to reflect the effect of a one for three
reverse stock split consummated on January 17, 1995. Primary earnings
per share is computed based on the weighted average number of shares
of common stock plus common stock equivalents. Shares issuable upon
the conversion of stock options and warrants, which are common stock
equivalents, were disregarded since the treasury stock method of
calculation produced no incremental shares or resulted in dilution of
less than 3%.
Fully diluted earnings per share is not presented since common stock
equivalents referenced above had no dilutive effect.
7
<PAGE> 10
2. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
October 31, July 31,
1995 1995
----------- ----------
(In thousands of dollars)
<S> <C> <C>
Revolving credit agreement due April 1997, at prime plus
3% ( 11.75% at October 31, 1995) $ 15,818 $ 14,123
Secured term loan due June 1997, at 10.75% 4,500 4,500
Secured Indonesian Rupiah revolving credit agreement
due September 1995, at 19% 894
Equipment purchase obligations maturing through
February 1999, at an average rate of 11.08% in 1995 17,035 16,641
----------- ---------
Total 37,353 36,158
Less current maturities 10,656 10,915
----------- ---------
Due after one year $ 26,697 $ 25,243
=========== =========
</TABLE>
The revolving credit agreement is with a finance company and provides a
revolving credit facility of up to $17,000,000 (increased from
$15,000,000 in April 1995) through April 11, 1997. Advances under the
agreement are limited by a borrowing formula and are collateralized by a
majority of the assets of the Company. The agreement limits, among other
things, the Company's right, without consent of the lender, to take
certain actions, including creating indebtedness, prohibits paying
dividends and requires the Company to maintain certain financial ratios.
The agreement also provides for the deposit of collections of certain of
the Company's accounts receivable into cash collateral accounts and for
the repayment of outstanding advances and monthly interest with such
proceeds. Amounts applied against outstanding advances are available for
reborrowing upon presentation of evidence of adequate borrowing base
coverage. At October 31, 1995, $1,182,000 was available for borrowing
under this agreement.
The secured term loan is due June 30, 1997, with interest at 10.75%
payable quarterly. A principal payment of $1,500,000 is due June 30,
1996, and the remaining unpaid principal is due June 30, 1997. The loan
agreement limits, but does not prohibit, the Company's ability to pay
dividends and to incur indebtedness for borrowed money and requires the
Company to maintain certain financial ratios. In April 1994, in
conjunction with the execution of the revolving credit agreement, the
lender was granted a security interest in a majority of the Company's
equipment. In connection with the loan, the Company issued common stock
purchase warrants to the lender.
8
<PAGE> 11
The secured Indonesian Rupiah revolving credit facility in the amount of
two billion Rupiahs was the obligation of P.T. Digicon Mega Pratama, a
consolidated subsidiary of the Company, and provided working capital and
certain bank guarantees for its Indonesian operations. The facility was
repaid September 1995.
The Company's equipment purchase obligations represent installment loans
and capitalized lease obligations primarily related to computing and
seismic equipment.
3. SALE OF TREASURY STOCK
In September 1995, the Company sold its 858,497 shares of treasury stock
to a group of institutional investors at a price of $4.6875 per share for
total cash proceeds of $4,024,204.
4. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
Three Months Ended October 31,
-----------------------------------
1995 1994
-------------- -------------
(In thousands of dollars)
<S> <C> <C>
Net foreign currency exchange (gain) loss $ (2) $ 7
Net (gain) loss on disposition of property and
equipment 137 (349)
Interest income (24) (37)
Other 7
------------- -------------
Total $ 111 $ (372)
============= =============
</TABLE>
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The seismic industry and its role in petroleum exploration, development and
production has changed substantially during recent years. Wider applications
of seismic technology have strongly shifted the emphasis to three dimensional
("3D") surveys, and the greater precision and improved subsurface resolution
obtainable from 3D seismic data have enabled oil and gas companies to utilize
these surveys to find new fields and to delineate more accurately existing
fields and to augment their reservoir management and production monitoring
techniques. It has been demonstrated that the enhanced subsurface resolution
obtainable from 3D studies has been a key factor in improving success ratios
and lowering finding and field extension costs for the oil industry during the
past several years.
The period has seen several trends develop which have changed the dynamics of
the industry. The proven success of 3D seismic offshore has led to a
significant increase in demand for 3D onshore and in transition zone areas.
Exploration activity by the major oil and gas companies, independents and data
brokers has increased, a trend brought about at least in part by the lower
finding costs which have resulted from the availability of 3D seismic onshore.
The Company began to increase its onshore focus in fiscal 1993 by acquiring GFS
Company, a major player in Gulf Coast transition zone areas. Subsequently, the
Company enhanced its onshore presence by adding four crews utilizing advanced
technology, high capacity I/O System Two equipment. One of the new crews is
working in the southern U.S. highland areas, another, to be upgraded to an RSR
radio telemetry crew, will begin work in the second quarter in transition zone
areas and two crews have been dedicated to the expanding South American
marketplace and are currently working together as one large crew under contract
in Argentina.
A second trend has been an increase in high capacity multi-element vessels
tailored for unobstructed blue water areas. Vessels equipped with multiple
streamers and multiple sources acquire more lines of data with each pass,
reducing the effective acquisition cost to the customer. To meet demand for
this type of vessel, the Company has upgraded the Polar Search with the latest
technology Syntron recording system. Configured with up to four streamers and
two energy sources, the vessel can simultaneously record up to eight seismic
lines, comparable to the majority of its competitors' vessels. The Company has
also developed its multiBOAT technology as a cost effective alternative to the
large multi-element vessels. The multiBOAT technology utilizes up to three
smaller vessels working together to simultaneously acquire multiple lines of
data. This technology is particularly effective in obstructed areas which
place a premium on maneuverability and versatility. The Company currently
operates a total of six vessels: three vessels working in multiBOAT mode in the
Gulf of Mexico, the Polar Search in the North Sea and two 2D vessels in the Far
East market.
A third trend is the proliferation of multi-client surveys both offshore and
onshore, brought about primarily by modifications in oil and gas company
spending strategy. In response to this demand, the Company began to
selectively add data to its library, primarily in the Gulf of Mexico and the
North Sea. Recent surveys have had significant initial funding by clients
which
10
<PAGE> 13
has reduced the Company's "up front" cash requirement for these surveys.
Beginning in fiscal 1993, 182,000 line miles of data have been added to the
Company's library at a cost of $48 million. Sales of library data increased
from $11.7 million in 1994 to $20.4 million in 1995 and totaled $5.6 million in
the first quarter of fiscal 1996, a 108% increase from the first quarter of the
prior year. Data sales are expected to provide above average returns for
several years in the future.
At October 31, 1995, the Company's backlog of commitments for services totaled
$73.3 million compared with $86.6 million at the end of fiscal 1995. The
majority of the reduction in backlog related to South American land operations
where contracts are typically awarded in January of each year. At October 31,
1995, 40% of the backlog related to marine acquisition, 32% to land acquisition
and 28% to data processing.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1996, the Company's stockholders' equity
increased to $63.6 million, an increase of $4.7 million during the quarter.
Primarily relating to additional borrowings under the Company's Revolving
Credit Agreement, total debt increased during the quarter to $37.4 million from
$36.2 at July 31, 1995. Tangible net worth (stockholders' equity less goodwill
and intangible assets) at October 31, 1995 increased to $60.6 million, compared
with $48.9 million at the end of fiscal 1994, as a result of the sale of the
Company's joint venture interests in the FSU and the resale of the common stock
received in the sale as discussed below and net earnings from operations.
The Company requires significant amounts of working capital to support its
operations and its capital expenditure and research and development programs.
The Company's foreign operations, which accounted for 54% of fiscal 1995
revenues and 58% of revenues in the first quarter of fiscal 1996, require
greater amounts of working capital than similar domestic activities, as the
average collection period for foreign receivables is generally longer than for
comparable domestic accounts. In addition, the Company has increased its
participation in non-exclusive data surveys and has significantly expanded its
library of proprietary data. Because of the lead time between survey execution
and sale, non-exclusive surveys generally require greater amounts of working
capital than contract work. During the past six months, this problem was
exacerbated as, for budgeting purposes, several clients have deferred payments
on data library purchases totaling in excess of $5.0 million until January and
February 1996. Depending on the timing of future sales of the data and the
collection of the proceeds from such sales, the Company's liquidity will
continue to be affected; however, the Company believes that these non-exclusive
surveys have good long-term sales, earnings and cash flow potential.
In recent years, the Company has updated and increased its data processing
capabilities, invested significant capital to outfit a new seismic vessel and
has, more recently, allocated significant resources to its land and transition
zone activities. Beginning in fiscal 1993, the Company committed a total of
$75.1 million for new capital equipment and invested approximately $12.6
11
<PAGE> 14
million in its research and development efforts. During 1996, the Company
expects to spend approximately $18.0 million for capital expenditures and
approximately $2.7 million for research and development activities. The
majority of capital spending in 1996 will be to upgrade and expand the
Company's land and marine data acquisition capabilities. Assuming customer
demand remains strong and financing for a significant portion of the equipment
cost is available, the Company expects to upgrade its two
swamp/marsh/transition zone crews dedicated to the U.S. Gulf Coast marketplace
with advanced technology high channel 3D equipment and to further upgrade the
two crews operating in Argentina. As previously mentioned, the first of the
two upgraded transition zone crews will begin operations in the second quarter.
The remainder of the capital expenditures during 1996 will be to complete the
relocation of the Company's data processing center in England, for various
vessel upgrades and additional data processing equipment. In fiscal 1996, the
Company also expects to invest approximately $8.0 million, net of third party
funding, in its data library.
The Company's internal sources of liquidity are cash balances ($3.5 million at
October 31, 1995) and cash flow from operations. External sources include the
sale of common stock, the unutilized portion of its working capital facility
described below (approximately $1.5 million on December 11, 1995), equipment
purchase obligations, vendor financing and trade credit. To provide additional
working capital, in April 1994, the Company obtained a three-year, $15.0
million revolving credit facility from a commercial finance company. The
facility was subsequently increased to $17.0 million in 1995 and provides for
borrowings of up to 80% of the majority of the Company's domestic and foreign
receivables at an interest rate of 3% over the prime rate, secured by most of
the Company's world-wide assets.
In conjunction with certain changes in senior management during 1994, the
Company initiated a comprehensive program designed to restructure each of the
Company's geographic and operational lines of business with the objective of
restoring profitability to its operations. These actions included personnel
reductions, office consolidations, vessel deactivations and redeployments and
the movement to outsource certain costly manufacturing and research and
development activities historically performed "in-house". The implementation
of this program has resulted in significant cost savings which are expected to
continue in fiscal 1996.
As part of the restructuring program, on August 31, 1994, the Company sold its
cable and canister manufacturing and repair facility and certain of its marine
and land data acquisition equipment, related data acquisition technology and
associated inventory to Syntron, Inc. The total sales price was $7.5 million,
of which $3.0 million was received in cash at closing, with the remainder
payable in credits to be applied against future purchases of advanced
technology digital recording equipment manufactured by Syntron. Syntron has
agreed to finance a significant portion of the purchase price of this
equipment.
Resulting from the assessment of the profit potential of each of the Company's
business segments conducted in conjunction with the restructuring program, on
June 6, 1995, the Company sold its interests in several joint venture companies
which had been formed to pursue geophysical service contracts in the former
Soviet Union ("FSU"). The Company believes that attractive opportunities will
eventually be developed in the FSU. However, the political and economic risk
associated with operations in the FSU, coupled with the significant
investment
12
<PAGE> 15
required to establish and maintain operations there, were not justified by the
near-term profit potential of that marketplace. In return for its joint
venture interests, the Company received $9.0 million of cash and the return of
the 1,708,497 shares of Digicon common stock issued in acquiring such
interests. The Company also is entitled to a royalty of up to $1.5 million
based upon future sales of speculative data currently being acquired in the
Caspian Sea.
In June 1995, 850,000 shares and in September 1995, the remaining 858,497
shares of the 1,708,497 shares returned in the sale of the FSU joint ventures
were sold to institutional investors at a price of $4.6875 per share. Net
proceeds of these sales totaled $8.0 million, of which approximately $4.0
million was received in each of the fourth quarter of fiscal 1995 and the first
quarter of fiscal 1996, and were utilized to increase the Company's liquidity
and to reduce outstanding indebtedness.
For financial reporting purposes, the Company has previously accrued income
taxes in respect of its marine data collection operations in Mexico during
fiscal 1992 and 1993 based on the amount of income taxes withheld by its
client, the state owned oil company. The Company believes that the income
taxes withheld (which total approximately $2.6 million) far exceed the taxes,
if any, which are due by the Company in respect of its operations in Mexico.
On August 21, 1992, the Company filed suit to recover all income taxes
withheld, and on June 3, 1993, the Company was notified that the tax court in
Mexico had issued a ruling which appeared to support the claim for recovery.
Both the Mexican tax authorities and the Company sought clarification of the
ruling from the appellate court in Mexico, and based on the appellate court's
ruling in November 1993, it appears that the Company's position has again been
supported. The Mexican tax authorities then raised additional objections which
resulted in the Company filing another suit in the tax court in Mexico in April
1995. As of December 14, 1995 the Company has not received a ruling regarding
this suit. Although the court rulings have been favorable, there is no
assurance that the Company will recover any significant portion of the withheld
taxes or, if such recovery is made, as to the timing of receipt. The Company
intends to continue to seek recovery of the withheld taxes but does not
presently intend to reflect any anticipated refunds thereof as a reduction in
income taxes until such time, if ever, that the excess amounts withheld are
received.
The Company believes that as a result of the cash generating and expenditure
reducing transactions concluded in the past two years, including the expanded
revolving credit agreement, the restructuring and expense reduction program,
the sale of assets and transfer of certain research functions to Syntron, the
disposition of the Company's investment in the FSU joint ventures, the sales of
common stock, and other asset dispositions, it has strengthened its working
capital position. Absent a substantial deterioration in the Company's markets,
the Company believes that it possesses sufficient liquidity to continue
operations on a satisfactory basis. However, if additional working capital
were to become necessary as a result of deterioration in demand for or pricing
of the Company's services, and if additional financing were not available, the
Company's operating results and financial condition could be adversely
affected.
13
<PAGE> 16
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995
During the first quarter of fiscal 1996, the Company reported net income of
$752,000 ($.07 per share), a 24% increase over the prior year's first quarter
net income of $607,000 ($.06 per share). Revenues increased 19%, from
$32,000,000 to $38,178,000. The improved operating results were attributable
mainly to expanded land and data processing operations and increased sales of
proprietary data. Margins of 20.3% in the current quarter declined slightly
from the prior year's quarter.
Land revenues of $14,120,000 increased 50% over the prior year and both North
American and South American operations were profitable. During the current
quarter, two of the North American crews performed 3D and transition zone
(water, marsh and swamp) surveys which generally provide higher revenues and
profit margins. The Company's third North American crew is currently shooting
a partially funded proprietary data survey which is providing revenues
consistent with the prior year but lower operating profits. Increased rates
and production recognized by the Company's large 3D crew operating in Argentina
resulted in increased revenues and operating profits in South America. One
South American crew has been deactivated and the remaining crews have been
combined for their current surveys, and, as a result, revenues and margins are
expected to decrease in this region during the second quarter of fiscal 1996.
Proprietary data sales of $5,601,000 increased 108% compared to the prior
year's quarter and profits generated by such sales increased significantly.
The Company has been steadily adding to its proprietary data library over the
last three years. Proprietary data sales generally provide better profit
margins since the non-exclusive data can be sold to multiple customers.
Proprietary data sales accounted for 15% of total revenues during the current
quarter compared with 8% during last year's quarter and the Company anticipates
that proprietary data sales will continue to contribute significantly to the
Company's revenues and net income in the future. A new survey is planned in
the third quarter of 1996 in the North Sea and additional surveys are being
considered in the Gulf of Mexico.
The Company's data processing revenues of $9,320,000 increased 5% over last
year's first quarter and margins increased during the period. The award of a
new contract at the Assen, Holland center in the second quarter of fiscal 1995,
an increase in capacity at the Houston and Singapore centers, and the improved
Far East market resulted in higher revenues and operating profits. The
reduction of overhead in the Company's Indonesian center as part of its planned
closure reduced that center's losses during the current quarter. Although the
closure of the Company's Bogota and Oklahoma City centers reduced revenues
during the current quarter, it had little impact on operating results.
Processing prices in the European market remained depressed and revenues and
margins in that area declined.
14
<PAGE> 17
Marine operating results declined during the first quarter. Revenues of
$9,137,000 decreased 16% compared to the prior year's quarter and marine
earnings also declined. Significantly impacting the current quarter's results
were production shortfalls from three vessels working on a multi-client survey
in the Gulf of Mexico, the result of the worst hurricane season in many years.
Approximately 93 vessel days of production were lost due to the adverse weather
conditions. Production on this survey was also adversely impacted by delays in
the start-up of a new vessel which was rigged for Gulf of Mexico multi-client
operations. Far East operations remained strong, although margins declined
somewhat from the prior year's results. Two vessels operated in the region
during most of the quarter acquiring 2D data. In September 1995, a vessel was
mobilized to the North Sea where it began a large survey for a client. The
survey is expected to be completed in January 1996, after which the vessel is
expected to perform a multi-client survey planned to last through the remainder
of the fiscal year.
Deprecation expense increased by approximately 7% due to equipment purchases
which include seismic equipment for the South American land crews, the
conversion of one of the Company's vessels to a new Syntrak recording system
and four new computers in the Houston, Singapore and UK centers. Financing for
these purchases and an increase in the average rates resulted in higher
interest expense during the current year quarter. The Company sold its
interests in the FSU joint ventures as previously discussed, thereby
eliminating amortization expense for intangibles and equity losses in the
current quarter. Selling, general and administrative expenses increased by 13%
primarily due to costs incurred in implementing a new administrative data
processing system.
Other costs and expenses for the current quarter consist primarily of net
losses on damaged cables. Other costs and expenses for the prior year quarter
consist primarily of a gain on the sale of a seismic vessel derigged in April
1994. Provision for income taxes in the current year's quarter relate
primarily to operations in South America and Malaysia. Provision for income
taxes in the prior year quarter relate primarily to operations in South America
and a tax assessment in Jakarta.
15
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of December 14, 1995, the Company was not a party to, nor was its property
the subject of, any material pending legal proceedings, as defined by relevant
rules and regulations of the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed with this report:
11) Computation of income per common and common equivalent share
for the three months ended October 31, 1995 and 1994.
b) Reports on Form 8-K
1) There were no reports filed on Form 8-K during the quarter
ended October 31, 1995.
16
<PAGE> 19
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.
<TABLE>
<S> <C>
DIGICON INC.
----------------------------------------------------
(Registrant)
Date: December 14, 1995 By: Stephen J. Ludlow
----------------------------------------------------
Stephen J. Ludlow
(President)
Date: December 14, 1995 By: Richard W. McNairy
----------------------------------------------------
Richard W. McNairy
(Principal Financial Officer)
</TABLE>
17
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
11 Computation of income per common and common equivalent share for the
three months ended October 31, 1995 and 1994.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
COMPUTATION OF INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended October 31,
--------------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
PRIMARY INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 10,584 10,956
=============== =============
Primary income per share $ .07 $ .06
=============== =============
FULLY DILUTED INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 10,584 10,956
Shares issuable from assumed conversion of:
Warrants 13
Stock options 4
--------------- -------------
Weighted average shares of common
stock outstanding, as adjusted 10,601 10,956
=============== =============
Fully diluted income per share $ .07 (3) $ .06 (2)
=============== =============
NET INCOME FOR PRIMARY AND FULLY
DILUTED COMPUTATION:
Net income $ 752 $ 607
=============== =============
</TABLE>
- ---------------
(1) Weighted average shares of common stock outstanding for all periods have
been restated for a one for three reverse stock split consummated on
January 17, 1995.
(2) This calculation is submitted in accordance with
Item 601(b)11 of Regulation S-K although warrants and stock options had no
dilutive effect.
(3) This calculation is submitted in accordance with Item 601(b)11 of
Regulation S-K although not required by footnote 2 to paragraph 14 of
APB Opinion No. 15 because warrants and options result in dilution of
less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DIGICON
INC.'S FORM 10-Q FOR THE QUARTER ENDED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 4,171
<SECURITIES> 0
<RECEIVABLES> 42,632
<ALLOWANCES> 653
<INVENTORY> 1,269
<CURRENT-ASSETS> 54,561
<PP&E> 115,017
<DEPRECIATION> 63,843
<TOTAL-ASSETS> 139,052
<CURRENT-LIABILITIES> 43,977
<BONDS> 26,697
<COMMON> 111
0
0
<OTHER-SE> 63,505
<TOTAL-LIABILITY-AND-EQUITY> 139,052
<SALES> 0
<TOTAL-REVENUES> 38,178
<CGS> 0
<TOTAL-COSTS> 36,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,282
<INCOME-PRETAX> 1,478
<INCOME-TAX> 726
<INCOME-CONTINUING> 752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 752
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
