<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996
REGISTRATION NO. 333-12481
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VERITAS DGC INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3701 KIRBY DRIVE, SUITE 112
HOUSTON, TEXAS 77098
(713) 512-8300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
RICHARD W. MCNAIRY
3701 KIRBY DRIVE, SUITE 112
HOUSTON, TEXAS 77098
(713) 512-8300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
<TABLE>
<S> <C>
T. WILLIAM PORTER J. MARK METTS
PORTER & HEDGES, L.L.P. VINSON & ELKINS L.L.P.
700 LOUISIANA, 35TH FLOOR 1001 FANNIN
HOUSTON, TEXAS 77002 2300 FIRST CITY TOWER
(713) 226-0600 HOUSTON, TEXAS 77002
(713) 758-2222
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRATION HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE> 2
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* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 17, 1996
$75,000,000
[LOGO]
VERITAS DGC INC.
% SENIOR NOTES DUE 2003
---------------------
The % Senior Notes due 2003 (the "Senior Notes") are being offered (the
"Offering") by Veritas DGC Inc. (the "Company"). Interest on the Senior Notes is
payable on and of each year, commencing , 1997.
The Company will not be required to make any mandatory redemption or sinking
fund payments with respect to the Senior Notes prior to maturity. The Senior
Notes are redeemable on or after , 2000 at the option of the Company,
in whole or in part, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
prior to , 1999, the Company may redeem up to $20.0 million in
aggregate principal amount of the Senior Notes with the net proceeds of one or
more public offerings of common stock of the Company, at a redemption price of
% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the redemption date; provided that at least $55.0 million principal amount of
the Senior Notes remain outstanding after such redemption.
In the event of a Change of Control (as defined in "Description of Senior
Notes"), holders of the Senior Notes will have the right to require the Company
to purchase their Senior Notes, in whole or in part, at a price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. There can be no assurance that the Company will
have sufficient funds available or will be permitted by its other debt
agreements to repurchase the Senior Notes upon the occurrence of a Change of
Control.
The Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all senior Indebtedness (as
defined) of the Company and senior to all Subordinated Indebtedness (as defined)
of the Company. The Senior Notes will be effectively subordinated to secured
Indebtedness of the Company with respect to the assets securing such
Indebtedness and to all Indebtedness of its subsidiaries, whether secured or
unsecured. At July 31, 1996, the Company and its subsidiaries had $41.1 million
of Indebtedness outstanding, all of which will be repaid with the proceeds of
the Offering. The Indenture pursuant to which the Senior Notes will be issued
will limit the ability of the Company and its subsidiaries to incur additional
indebtedness. The Senior Notes will be represented by a Global Note registered
in the name of the nominee of The Depository Trust Company, which will act as
the Depository (the "Depository"). Beneficial interests in the Global Note will
be shown on, and transfers thereof will be effected only through, records
maintained by the Depository and its participants. Except as described herein,
Senior Notes in definitive form will not be issued. See "Description of Senior
Notes -- Book-Entry; Delivery and Form."
The Company does not intend to apply for listing of the Senior Notes on any
securities exchange or for inclusion of the Senior Notes in any automated
quotation system.
SEE "RISK FACTORS" BEGINNING AT PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SENIOR NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE TO AND PROCEEDS TO
PUBLIC* COMMISSIONS+ COMPANY++
<S> <C> <C> <C>
Per Senior Note........................................... % % %
Total..................................................... $ $ $
</TABLE>
- ---------------
* Plus accrued interest, if any, from the date of issuance.
+ The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
++ Before deducting expenses payable by the Company, estimated to be
$500,000.
The Senior Notes are being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the Global Note will
be made on or about , 1996 in book-entry form through the facilities
of the Depository against payment therefor in same day funds. The Underwriters
are:
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
RAUSCHER PIERCE REFSNES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR
NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated by such forward-looking statements.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Senior Notes offered by this Prospectus. Certain portions of
the Registration Statement have not been included in this Prospectus. For
further information, reference is made to the Registration Statement. Statements
made in this Prospectus regarding the contents of any contract or document filed
as an exhibit to the Registration Statement are not necessarily complete and, in
each instance, reference is hereby made to the copy of such contract or document
so filed. Each such statement is qualified in its entirety by such reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and its regional offices at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 13, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such materials
also can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, on which the common stock of the Company (the
"Common Stock") is listed. The Commission maintains a site on the World Wide Web
that contains certain documents filed with the Commission electronically. The
address of such site is http://www.sec.gov. and the Registration Statement may
be inspected at such site.
3
<PAGE> 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 1-7427), are incorporated in
this Prospectus by reference and shall be deemed to be a part hereof:
(a) the Company's Annual Report on Form 10-K for the year ended July 31,
1996;
(b) the Company's Current Report on Form 8-K dated September 16, 1996; and
(c) Definitive Joint Management Information Circular and Proxy Statement of
the Company and Veritas Energy Services Inc. filed with the Commission
on July 22, 1996.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part of this Prospectus from the date of filing
of such document. Any statement contained in this Prospectus, in a supplement to
this Prospectus or in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed supplement
to this Prospectus modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written or telephone requests for
such copies should be directed to the Company at its principal executive offices
located at 3701 Kirby Drive, Suite 112, Houston, Texas 77098, Attention:
Corporate Secretary (telephone number: (713) 512-8300).
4
<PAGE> 5
PROSPECTUS SUMMARY
The Company was formerly named Digicon Inc. ("Digicon"). On August 30,
1996, Digicon and Veritas Energy Services Inc. ("VES") consummated a business
combination (the "Combination") pursuant to which, among other things, (i) VES
became a wholly-owned subsidiary of Digicon and (ii) Digicon's corporate name
was changed to "Veritas DGC Inc." Unless the context otherwise requires, all
references to the "Company" are to Veritas DGC Inc. and its subsidiaries and
give effect to the consummation of the Combination. Unless the context otherwise
requires, all references to activities of, and financial information with
respect to, the Company are presented on a combined basis, even with respect to
periods prior to the consummation of the Combination.
The following summary should be read in conjunction with and is qualified
in its entirety by the information and supplemental consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus
and the documents incorporated by reference herein. Unless the context otherwise
requires, the number of shares, per share prices, weighted average number of
shares outstanding and per share amounts in this Prospectus have been adjusted
to reflect (i) a one-for-three reverse stock split effected in January 1995 and
(ii) the Combination. All capitalized terms used in this Summary without a
definition are defined as set forth elsewhere in this Prospectus, included under
the caption "Description of Senior Notes."
THE COMPANY
GENERAL
The Company is a leading provider of seismic data acquisition, data
processing, multi-client data surveys, and information services to the oil and
gas industry in selected markets worldwide. Oil and gas companies utilize
seismic data for the determination of suitable locations for drilling
exploratory wells and, increasingly, in reservoir management for the development
and production of oil and gas reserves. The Company acquires seismic data on
land and in marine, and in marsh, swamp and tidal ("transition zone")
environments, processes data acquired by its own crews and crews of other
operators and provides comprehensive data management, mapping services and
products. The Company acquires seismic data both on an exclusive contractual
basis for its customers and on its own behalf for licensing to multiple
customers on a non-exclusive basis.
To increase its presence in the rapidly expanding market for onshore
geophysical services, the Company recently effected the Combination with VES, a
leading seismic contractor with ten land seismic crews, nine workstation-based
land seismic data processing centers and 800 operating personnel. Pursuant to
the Combination, the Company acquired all of the voting securities of VES in
exchange for the issuance to VES' shareholders of the economic equivalent of
approximately 7.0 million shares of the Company's Common Stock.
Prior to the Combination, the Company initiated a comprehensive program
designed to refocus each of the Company's geographic and operational lines of
business. The Company's actions included: (i) selling its seismic equipment
manufacturing operations; (ii) selling its joint venture interests in the former
Soviet Union ("FSU"); (iii) deploying its land and transition zone crews and its
marine crews into markets where the Company's presence would be significant;
(iv) expanding its accumulation and licensing of multi-client data surveys to
capitalize on the historically higher margins associated with non-exclusive data
sales; (v) emphasizing research and development on its proprietary software in
order to capitalize on its reputation for seismic data processing innovation;
and (vi) streamlining its cost structure through personnel reductions, office
consolidations, vessel deactivations and the outsourcing of certain development
and manufacturing functions.
In the current fiscal year, the Company has embarked upon a $67.4 million
capital expenditure program designed to increase its efficiency and improve the
competitive position of its principal products and services and to enable the
Company to capitalize on high-growth/high-margin opportunities in selected
markets.
5
<PAGE> 6
In its land and transition zone activities, the Company expects to spend
approximately $14.3 million to upgrade and standardize the equipment utilized by
its crews to improve operating efficiency and to provide the capability to
expand its activities in transition zone environments in the United States and
abroad.
In its marine activities, the Company expects to spend approximately $40.0
million to upgrade and add to its multi-streamer vessel capability. This
increased capability is expected to improve operations and to provide increased
multi-client data survey opportunities, particularly in the deep water sectors
of the Gulf of Mexico and the North Sea where demand is expected to grow
significantly.
The Company also expects to spend approximately $11.0 million to upgrade
its data processing equipment and to expand overall data processing capacity to
further enhance its capabilities for sophisticated processing of acquired
seismic data.
INDUSTRY OVERVIEW
Geophysical services enable oil and gas companies to determine whether
subsurface conditions are likely to be favorable for finding new oil and gas
accumulations and assist oil and gas companies in determining the size and
structure of previously identified oil and gas fields. These services consist of
the acquisition and processing of three-dimensional ("3D") and two-dimensional
("2D") seismic and other geophysical data, which is used to produce
computer-generated graphic cross-sections and maps of the subsurface strata. The
resulting cross-sections and maps are then analyzed and interpreted by
geophysicists and are used by oil and gas companies in the acquisition of new
leases, the selection of drilling locations on exploratory prospects and in
reservoir development and management.
Geophysical data is acquired by land, transition zone and marine crews. In
data acquisition, a source of acoustical energy is employed at or below the
earth's surface and an acoustical wave is produced through the discharge of
compressed air, the detonation of small explosive charges, or other energy
generating techniques. As the acoustical wave travels through the earth,
portions are reflected by variations in the underlying rock layers, and the
reflected energy is captured by geophones situated at intervals along specified
paths from the point of acoustical impulse. The resulting signals are then
transmitted to a recording unit which amplifies the reflected energy wave and
converts it into digital data. This data is then input into a specialized data
processing system that enhances the recorded signal by reducing noise and
distortion and improving resolution and arranges the input data to produce, with
the aid of plotting devices, an image of the subsurface strata. By interpreting
seismic data, oil and gas companies create detailed maps of prospective areas
and producing oil and gas reservoirs.
Three-dimensional surveys involve the acquisition of a very dense grid of
seismic data over a precisely defined area. This heavy concentration of data
requires extensive computer processing, involving the use of sophisticated
proprietary techniques, to produce an accurate image of the subsurface. Computer
analysis of the 3D survey data allows geophysicists to better examine and
interpret important subsurface features.
Over the last several years, worldwide demand for 3D surveys by major oil
and gas companies and independent producers has increased. The greater precision
and improved subsurface resolution obtainable from 3D seismic data have assisted
oil and gas companies in finding new fields and more accurately delineating
existing fields, as well as enhancing existing reservoir management and
production monitoring techniques. Enhanced subsurface resolution obtainable from
3D studies has been a key factor in improving drilling success ratios and
lowering finding and field extension costs in land, transition zone and marine
environments. This improved technology, coupled with advances in drilling and
completion techniques, are enhancing the industry's ability to develop oil and
gas reserves, particularly in transition zone and deep water environments.
6
<PAGE> 7
COMPANY OVERVIEW
The Company provides land and transition zone data acquisition, marine data
acquisition, and data processing services to the oil and gas industry on an
exclusive contractual basis and acquires and processes seismic data for its own
account for licensing to multiple customers on a non-exclusive basis. It also
develops and markets exploration and development information services.
Land and transition zone data acquisition. The Company's land and
transition zone data acquisition crews consist of (i) a surveying unit that lays
out the lines to be recorded, (ii) an explosives or mechanical vibrating unit
and (iii) a recording unit that lays out the geophones and recording
instruments. The Company also utilizes helicopters to aid its crews in seismic
data acquisition in situations where such use will reduce overall costs and/or
improve productivity. The Company's land and transition zone data acquisition
services are currently conducted by 16 seismic crews, seven of which are
operating in the continental United States, five of which are operating in
Canada, and four of which are operating in South America, currently in
Argentina, Ecuador and Peru. In fiscal 1996, land and transition zone data
acquisition accounted for approximately 47% of the Company's revenues.
The successful utilization of 3D seismic survey data in offshore
exploration efforts has led to a significant increase in demand for 3D seismic
surveys in onshore and transition zone environments. In recent years,
exploration activity in land and transition zone areas by the major oil and gas
companies and independents has increased. As a result, in fiscal 1996, as
compared to fiscal 1993, the Company's land and transition zone data acquisition
revenues have increased 159%.
The Company plans to spend approximately $14.3 million during fiscal 1997
which it believes will provide efficiencies and additional capacity in its land
and transition zone data acquisition operations. Of this amount, approximately
$3.4 million will be used to acquire geophones and cables which will result in
standardization of this equipment so that such equipment will be interchangeable
among the Company's seismic crews. In addition, three of the transition zone
crews have been recently upgraded to Input/Output System Two Remote Seismic
Recorder ("I/O System Two-RSR") equipment at a cost of approximately $6.0
million.
Marine data acquisition. The Company's marine data acquisition crews
operate on chartered vessels equipped with a full complement of seismic,
navigational and communications equipment. All of the vessels operated by the
Company are equipped to perform both 3D and 2D seismic surveys. As of September
1, 1996, the Company had seven vessels in operation, with three located in the
Gulf of Mexico, two located in the North Sea, and one located in each of
Malaysia and Indonesia. Except for the two vessels in the Far East, the
Company's chartered vessels are predominantly engaged in acquiring 3D surveys.
In fiscal 1996, marine data acquisition accounted for approximately 22% of the
Company's revenues.
Vessels with multiple streamers and multiple energy sources acquire more
lines of data with each pass, reducing time to completion and the effective
acquisition cost. At present, only one of the Company's vessels is equipped for
multi-streamer operation. Accordingly, the Company is reviewing options with
respect to its expiring charters, and is considering upgrading vessels and
adding one or more new vessels at an aggregate cost of approximately $34.8
million. The Company presently expects to operate a total of three
multi-streamer vessels in the Gulf of Mexico and the North Sea. These expansions
and upgrades represent the primary portion of the Company's $40.0 million
capital expenditure budget for marine operations in fiscal 1997.
Data processing. The Company currently operates 16 geophysical data
processing centers, including two under contract to major oil and gas companies.
These centers process data acquired by the Company's own crews and crews of
other operators. Seven of these centers are configured primarily for processing
large-scale offshore surveys and operate high capacity, advanced technology NEC
and Hewlett Packard mainframe computer systems with high speed networks. The
other nine centers are utilized primarily for smaller scale land seismic surveys
and operate data processing systems with
7
<PAGE> 8
47 Sun workstations. In fiscal 1996, data processing accounted for approximately
20% of the Company's revenues.
The Company has dedicated approximately $11.0 million of its fiscal 1997
capital budget to data processing activities. Because of the increased
complexity of processing 3D surveys, the Company plans to retire certain of its
older mainframe equipment and upgrade to more powerful and flexible
workstation-based systems at five of its data processing centers which are
dedicated primarily to processing marine data. In its land processing
operations, the Company is acquiring additional Sun workstations to add capacity
at existing processing centers and to equip two new processing centers. These
expansions and upgrades are expected to increase capacity and lower operating
costs.
Licensing of multi-client data surveys. The Company also acquires and
processes seismic data for its own account through surveys either partially or
wholly funded by multiple customers. In this mode of operation, the Company
retains ownership of the data and may later license such data on a non-exclusive
basis. During the two year period ended July 31, 1996, 188,642 line miles of new
seismic data were added to the Company's data library, and the Company expects
to continue its recent emphasis on the licensing of its own library of seismic
data to multiple customers. In fiscal 1996, the licensing of such multi-client
data surveys accounted for 9% of the Company's revenues.
The industry has experienced a proliferation of both offshore and onshore
multi-client data surveys as a result of modifications in oil and gas company
spending strategies. In response to this increased demand, the Company is adding
data to its library, primarily in the Gulf of Mexico and the North Sea. Recent
surveys have received significant initial funding from customers, which has
reduced the related risk for the Company. Generally, the Company obtains
pre-funding commitments for a majority of the cost of such surveys.
Historically, the licensing of multi-client data has produced higher returns
than the Company's other classes of services.
Exploration and Development Information Services. The Company also provides
various exploration and development information services to the oil and gas
industry. These services include data verification through geophysical survey
audit, seismic database management, service bureau mapping of surface and
subsurface oil and gas information, data supply for grid, culture, wells,
pipelines, land and related data sets and mapping systems, as well as
geographical information systems software development. In fiscal 1996,
exploration and development information services accounted for approximately 2%
of the Company's revenues.
8
<PAGE> 9
THE OFFERING
Securities Offered......... $75 million principal amount of % Senior Notes
due 2003.
Maturity Date.............. , 2003.
Interest Rate and Payment
Dates.................... The Senior Notes will bear interest at a rate of
% per annum. Interest on the Senior Notes will
accrue from the date of issuance thereof and will
be payable semi-annually in cash in arrears on
and of each year, commencing
, 1997.
Optional Redemption........ The Senior Notes will be redeemable at the option
of the Company, in whole or in part, at any time on
or after , 2000, at the redemption prices
set forth herein, together with accrued and unpaid
interest to the date of redemption. In the event
the Company consummates a Public Equity Offering on
or prior to , 1999, the Company may at
its option use all or a portion of the proceeds
from such offering to redeem up to $20.0 million
principal amount of the Senior Notes at a
redemption price equal to % of the aggregate
principal amount thereof, together with accrued and
unpaid interest to the date of redemption, provided
that at least $55.0 million in aggregate principal
amount of Senior Notes remain outstanding
immediately after such redemption. See "Description
of Senior Notes -- Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of Senior Notes will have the right to
require the Company to purchase all or a portion of
such holder's Senior Notes at a price equal to 101%
of the aggregate principal amount thereof, together
with accrued and unpaid interest to the date of
purchase. See "Description of Senior
Notes -- Certain Covenants -- Change of Control."
Certain Covenants.......... The Indenture relating to the Senior Notes will
contain certain covenants, including covenants
which limit: (i) indebtedness; (ii) restricted
payments; (iii) issuances and sales of capital
stock of restricted subsidiaries; (iv)
sale/leaseback transactions; (v) transactions with
affiliates; (vi) liens; (vii) asset sales; (viii)
dividends and other payment restrictions affecting
restricted subsidiaries; (ix) conduct of business;
and (x) mergers, consolidations and sales of
assets. See "Description of Senior Notes -- Certain
Covenants" and "-- Merger, Consolidation and Sale
of Assets."
9
<PAGE> 10
Ranking.................... The Senior Notes will be senior unsecured
obligations of the Company, ranking pari passu in
right of payment with all senior Indebtedness of
the Company and senior to all Subordinated
Indebtedness of the Company. The Senior Notes,
however, will be effectively subordinated to
secured Indebtedness of the Company with respect to
the assets securing such Indebtedness and to all
Indebtedness of its subsidiaries, whether secured
or unsecured. The Indenture will limit the ability
of the Company and its subsidiaries to incur
additional indebtedness. At July 31, 1996, the
Company and its subsidiaries had $41.1 million of
outstanding Indebtedness, all of which will be
repaid with the proceeds of the Offering. See
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and
"Description of Senior Notes -- Ranking" and
"-- Limitation on Indebtedness and Disqualified
Capital Stock."
Use of Proceeds............ The net proceeds to the Company from the sale of
the Senior Notes are estimated to be approximately
$72.2 million. Of this amount, approximately $41.1
million will be used to retire outstanding
Indebtedness and the remaining $31.1 million will
be utilized to fund a portion of the Company's
$67.4 million capital expenditure budget for fiscal
1997. See "Use of Proceeds" and
"Business -- Technology and Capital Expenditures."
10
<PAGE> 11
VERITAS DGC INC. AND SUBSIDIARIES
SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary supplemental consolidated financial
information ("Selected Information") for each of the five years in the period
ended July 31, 1996. Such Selected Information for the four years ended July 31,
1996 has been derived from the audited Supplemental Consolidated Financial
Statements of the Company and the related notes thereto. The Supplemental
Consolidated Financial Statements and related notes thereto for the three years
ended July 31, 1996 are included elsewhere herein, which statements have been
audited by Deloitte & Touche LLP, independent auditors, whose report is included
elsewhere herein. The Selected Information for the year ended July 31, 1992 has
been derived from the unaudited supplemental consolidated financial statements
of the Company. In the opinion of management, the Selected Information for the
year ended July 31, 1992 includes all adjustments necessary to present fairly
the results of such period.
As a result of the differing year ends of Digicon and VES, results of
operations for dissimilar year ends have been combined. Digicon's results of
operations for fiscal years ended July 31, 1992, 1993, 1994 and 1995 have been
combined with VES' results of operations for fiscal years ended October 31,
1992, 1993, 1994 and 1995, respectively. To conform year ends, Digicon's results
of operations for the year ended July 31, 1996 have been combined with VES'
results of operations for the twelve months ended July 31, 1996. Accordingly,
VES' operating results for the period August 1, 1995 through October 31, 1995
are included in the years ended July 31, 1995 and 1996. An adjustment in an
amount equal to the results of operations for the three-month period is included
in the supplemental consolidated statements of changes in stockholders' equity.
VES' revenues, net income and net income per share were $22,150,000, $936,000
and $.05, respectively, for the period August 1, 1995 through October 31, 1995.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 116,826 $ 146,090 $ 178,392 $ 215,630 $ 250,596
Costs and expenses:
Operating expenses:
Cost of services................................... 95,022 121,873 144,984 170,424 198,711
Restructuring...................................... 838
Write-off/write-down for impairment of assets........ 5,235 3,628
Depreciation and amortization........................ 7,836 11,741 19,119 23,732 26,921
Selling, general and administrative.................. 4,183 4,797 6,296 5,855 7,255
Interest............................................. 2,579 1,928 3,213 5,170 5,466
Merger related costs................................. 3,666
Gain on sale of investment in FSU joint ventures..... (4,370)
Other................................................ 181 (210) (1,833) 232 546
-------- -------- -------- -------- --------
Total............................................ 109,801 140,129 177,852 201,043 246,193
-------- -------- -------- -------- --------
Income before provision for income taxes and equity in
loss of 50% or less-owned companies and joint
ventures............................................. 7,025 5,961 540 14,587 4,403
Provision for income taxes............................. 1,229 3,183 5,929 3,807 2,009
Equity in loss of 50% or less-owned companies and joint
ventures............................................. 1,521 2,204 4,965 5,186 1,113
-------- -------- -------- -------- --------
Net income (loss)...................................... $ 4,275 $ 574 $ (10,354) $ 5,594 $ 1,281
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(1).............................................. $ 17,440 $ 19,630 $ 28,945 $ 39,119 $ 44,084
Pro forma interest expense(2).......................... 8,081
Capital expenditures................................... 18,157 42,148 29,772 33,634 32,860
Investments in multi-client data library............... 4,114 5,132 16,019 21,360 14,906
EBITDA/Pro forma interest expense...................... 5.46x
Consolidated Fixed Charge Coverage Ratio(3)............ 3.95x
Pro forma debt/EBITDA(2)............................... 1.70x
Ratio of earnings to fixed charges(4)(5)............... 1.57x 1.44x 0.59x 1.65x 1.22x
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................... $ 8,567 $ 5,321 $ 15,545 $ 10,082 $ 10,072
Working capital........................................ 16,362 9,704 16,794 14,830 22,479
Property and equipment -- net.......................... 30,509 60,889 68,423 75,379 79,010
Multi-client data library.............................. 6,578 9,203 18,500 27,976 25,628
Total assets........................................... 93,738 141,464 171,814 184,340 198,592
Long-term debt (including current maturities).......... 17,933 30,890 31,104 36,788 41,090
Stockholders' equity................................... 46,748 69,380 94,517 98,000 105,923
OPERATING DATA (UNAUDITED):
Land crews in operation................................ 8 12 16 15 14
Land crews system channels............................. 6,248 12,740 14,526 17,200 18,708
Marine vessels in operation............................ 9 7 5 6 7
Marine vessels system channels......................... 2,400 2,160 1,680 1,920 3,840
Data processing centers in operation................... 13 15 17 17 16
</TABLE>
- ---------------
(1) EBITDA represents income before provision for income taxes and equity in
loss of 50% or less-owned companies and joint ventures plus restructuring
costs plus write-off/write-down for impairment of assets plus depreciation
and amortization plus interest expense plus merger related costs less gain
on sale of investment in FSU joint ventures. EBITDA is presented not as an
alternative measure of operating results or cash flow from operations (as
determined in accordance with generally accepted accounting principles),
but rather to provide additional information related to the debt servicing
ability of the Company.
(2) After giving effect to the issuance of the Senior Notes and the application
of proceeds therefrom.
(3) As defined in "Description of Senior Notes -- Certain Definitions --
Consolidated Fixed Charge Coverage Ratio."
(4) For the year ended July 31, 1994, earnings were insufficient to cover fixed
charges by $4.4 million.
(5) The effect of the refinancing impacts the ratio of earnings to fixed
charges by less than 10%. Therefore, the pro forma ratio is not presented.
11
<PAGE> 12
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus.
RANKING OF THE SENIOR NOTES; SECURITY
Although the Senior Notes will be senior unsecured obligations of the
Company ranking pari passu with all other existing and future senior debt of the
Company, the indebtedness of the Company under the Credit Agreement dated as of
July 18, 1996 among the Company and Digicon Geophysical Corp., Veritas DGC Land
Inc. (formerly 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 (the "Credit Facility"), is secured by
substantially all the assets of the Company other than the assets of VES.
Accordingly, the Senior Notes will be effectively subordinated to the extent of
such security interests. After the application of the proceeds from this
Offering, all indebtedness outstanding under the Credit Facility will be repaid,
but future borrowings under the Credit Facility (or under other secured lending
arrangements) will be permitted, subject to the applicable terms, conditions and
limitations thereof and to the Indenture. Subject to the completion of the
Offering, the bank has agreed to amend the Credit Facility. Under the amended
Credit Facility, the Company will be entitled to borrow up to $15.0 million on a
revolving basis secured by substantially all the receivables of the Company. The
bank will release its existing security interest in assets of the Company other
than such receivables. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Senior Notes."
DEPENDENCE ON SUBSIDIARIES; HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Company is principally a holding company whose assets consist primarily
of stock in its subsidiaries. Consequently, the Company's ability to repay its
indebtedness, including the Senior Notes, depends on the earnings of its
subsidiaries and on its ability to receive funds from such subsidiaries through
dividends, repayment of intercompany notes or other payments. In addition, the
ability of the Company's subsidiaries to pay dividends, repay intercompany notes
or make other advances to the Company is subject to restrictions imposed by
corporate law and certain United States, state and foreign tax considerations.
Several of the Company's subsidiaries are incorporated outside the United
States.
Because the Company is a holding company and the Senior Notes are not
guaranteed by any of its subsidiaries, the Senior Notes are effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries, including both senior and subordinated Indebtedness of these
subsidiaries, and regardless of whether such liabilities are secured or
unsecured. Without limiting the generality of the foregoing, the Senior Notes
will be effectively subordinated to the trade creditors of the Company's
subsidiaries. Immediately after the Offering, the subsidiaries will have no
material Indebtedness. Certain of the subsidiaries are co-borrowers under the
Credit Facility.
The Indenture will not restrict the incurrence of Indebtedness by any
Unrestricted Subsidiary. The Indenture will prohibit the Restricted Subsidiaries
from incurring Indebtedness except for (i) one or more working capital credit
facilities in an aggregate principal amount at any time outstanding up to the
Maximum Bank Credit Amount (initially $20 million), (ii) Indebtedness to the
Company; or (iii) Indebtedness in an aggregate principal amount at any time
outstanding up to the excess, if any, of (A) 10% of the Company's Consolidated
Net Tangible Assets over (B) the greater of $20.0 million or the aggregate
principal amount of outstanding secured Indebtedness of the Company incurred in
compliance with clause (a) of the "-- Limitation on Indebtedness and
Disqualified Capital Stock" covenant; provided, however, that the Indebtedness
described in clause (iii) may be incurred only if, on a pro forma basis after
giving effect to such incurrence and the application of the proceeds therefrom,
the Consolidated Fixed Charge Coverage Ratio for the four full quarters
immediately preceding such event, taken as one period, would have been equal to
or greater than 2.5 to 1.0. See "Description of Senior Notes -- Certain
Covenants -- Limitation on Indebtedness and Disqualified Capital Stock."
12
<PAGE> 13
LEVERAGE AND LIQUIDITY
At July 31, 1996, after giving effect to the issuance of the Senior Notes
offered hereby and the application of the net proceeds therefrom, the Company
would have had total consolidated debt of approximately $75 million and a ratio
of total consolidated debt to total capitalization of approximately 41.5%. The
degree to which the Company will be leveraged could have important consequences
to holders of the Senior Notes, including the following: (i) the Company's
ability to obtain financing in the future for working capital, capital
expenditures and general corporate purposes may be impaired; (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness; and (iii) a high degree
of leverage may make the Company more vulnerable to economic downturns and may
limit its ability to withstand competitive pressures.
Based on current operations, the Company expects that it will be able to
service the interest and principal obligations on its indebtedness as well as
its working capital needs and to fund its capital expenditures and other
operating expenses out of cash flow from operations and available borrowings
under the Credit Facility. However, there can be no assurance that the Company's
business will continue to generate cash flow at levels sufficient to meet these
requirements. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt and capital expenditures, it may be
required to sell assets, reduce capital expenditures, refinance all or a portion
of its existing debt (including the Senior Notes) or obtain additional
financing. There can be no assurance that any such asset sales or refinancing
would be possible or that any additional financing could be obtainable. The
Company's ability to meet its debt service obligations will be dependent upon
its future performance which, in turn, will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control.
ENERGY INDUSTRY SPENDING
Demand for the Company's seismic services depends upon the level of capital
expenditures by oil and gas companies for exploration, production, development
and field management activities. These activities depend in part on oil and gas
prices, expectations about future prices, the cost of exploring for, producing
and delivering oil and gas, the sale and expiration dates of leases in the
United States, Canada and abroad, local and international political, regulatory
and economic conditions and the ability of oil and gas companies to obtain
capital. In addition, a decrease in oil and gas expenditures could result from
such factors as unfavorable tax and other legislation or uncertainty concerning
national energy policies. No assurance can be given that current levels of oil
and gas activities will be maintained or that demand for the Company's services
will reflect the level of such activities. Decreases in oil and gas activity
could have a significant adverse effect upon the demand for the Company's
services and the Company's results of operations.
COMPETITION FOR SEISMIC BUSINESS
Competition among seismic contractors historically has been intense.
Competitive factors include price, crew experience, equipment availability,
technological expertise and reputation for quality and dependability. Certain of
the Company's major competitors operate more data acquisition crews than the
Company, have substantially greater revenues than the Company and are
subsidiaries or divisions of major industrial enterprises having far greater
financial and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully against its competitors for
contracts to conduct seismic surveys and process data. See "Business --
Competition and Other Business Conditions."
HAZARDOUS OPERATING CONDITIONS
The Company's data acquisition activities involve operating under extreme
weather and other hazardous conditions. Accordingly, these operations are
subject to risks of loss to property and injury to personnel from such causes as
fires, adverse weather and accidental explosions. The Company carries
13
<PAGE> 14
insurance against these risks in amounts that it considers adequate. The Company
may not, however, be able to obtain insurance against certain risks or for
certain equipment located from time to time in certain areas of the world.
INVESTMENT IN MULTI-CLIENT DATA LIBRARY
The Company has invested significant amounts in acquiring and processing
multi-client data that is owned by the Company (book carrying value of $25.6
million at July 31, 1996), and it expects to continue doing so for the
foreseeable future. Although the Company normally obtains prefunding commitments
for a majority of the cost of acquiring and processing such surveys, future data
licensing to multiple customers may not fully recoup its costs. Factors
affecting the Company's ability to recoup its costs include possible
technological, regulatory or other industry or general economic developments,
any of which could render all or portions of the Company's library of
multi-client data obsolete or otherwise impair its value. In addition, the
timing of multi-client data licensing is typically less dependable from period
to period than are revenues from surveys performed on an exclusive contract
basis for single customers.
HIGH FIXED COSTS; CAPITAL INTENSIVE BUSINESS; RISK OF TECHNOLOGICAL OBSOLESCENCE
Because of the high fixed costs involved in the major components of the
Company's business, downtime or low productivity due to reduced demand, weather
interruptions, equipment failures or other causes can result in significant
operating losses. In recent years, the Company's contracts for data acquisition
have been predominately on a turnkey or on a combination of turnkey/time basis.
Under the turnkey method, payments for data acquisition services are based upon
the amount of data collected, and the Company bears substantially all of the
risk of business interruption caused by inclement weather and other hazards.
When a combination of both turnkey and time methods is used, the risk of
business interruptions is shared in an agreed percentage by the Company and the
customer.
Seismic data acquisition and processing is a capital intensive business.
The development of seismic data acquisition and processing equipment has been
characterized by rapid technological advancements in recent years and the
Company expects this trend to continue. There can be no assurance that
manufacturers of seismic equipment will not develop new systems that have
competitive advantages over systems now in use that either render the Company's
current equipment obsolete or require the Company to make significant capital
expenditures to maintain its competitive position. The Company intends to
upgrade its data acquisition and processing equipment as often as necessary to
maintain its competitive position. However, to do so may require large
expenditures of capital in addition to the Company's planned capital
expenditures. There can be no assurance that the Company will have the necessary
capital or that financing will be available on favorable terms. If the Company
is unable to raise the capital necessary for its capital expenditure program and
to upgrade its data acquisition and processing equipment to the extent
necessary, it may be materially and adversely affected.
RISKS INHERENT IN INTERNATIONAL OPERATIONS
In fiscal 1995 and 1996, 61% and 62%, respectively, of the Company's
revenues were derived from international operations and export sales, which are
subject in varying degrees to risks inherent in doing business abroad. Such
risks include the possibility of unfavorable circumstances arising from host
country laws or regulations. For example, the Company has approximately 6,500
line miles of offshore Peru seismic data (book value of approximately $1.4
million at July 31, 1996) which will become saleable only upon receipt of
previously expected governmental licenses which have been delayed for more than
a year and has a $2.6 million claim for income taxes withheld by its client, a
foreign national oil company (no book carrying value), which will become
collectible only upon approval by the host country's taxation authorities. In
addition, foreign operations include risks of partial or total expropriation;
currency exchange rate fluctuations and restrictions on currency repatriation;
the disruption of operations from labor and political disturbances, insurrection
or war; and the requirements of partial local ownership of operations in certain
countries. To minimize such risks, the Company generally
14
<PAGE> 15
denominates its contracts in U.S. dollars and other currencies it believes to be
stable. The Company also obtains insurance against war, expropriation,
confiscation and nationalization when such insurance is available and when
management considers it advisable to do so. Such coverage is not always
available, and when available, is subject to unilateral cancellation by the
insuring companies on short notice.
ENVIRONMENTAL AND OTHER REGULATIONS
The Company's operations are subject to a variety of foreign, federal,
state and local laws and regulations, including laws and regulations relating to
the protection of the environment. The Company is required to invest financial
and managerial resources to comply with such laws and related permit
requirements in its operations and anticipates that it will continue to do so in
the future. In recent years, an increased number of the Company's data
acquisition contracts have required customers to obtain all necessary permits.
Customers' failure to timely obtain the required permits may result in crew
downtime and operating losses. To date, the Company's cost of complying with
governmental regulation has not been material, but the fact that such laws or
regulations are changed frequently makes it impossible for the Company to
predict the cost or impact of such laws and regulations on its future
operations. The modification of existing laws or regulations or the adoption of
new laws or regulations curtailing offshore drilling for oil and gas or imposing
more stringent restrictions on seismic operations could adversely affect the
Company.
CHANGE OF CONTROL
Upon a Change of Control (as defined herein), the Company will be required
to offer to repurchase all of the outstanding Senior Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. There can be no assurance that the Company will have sufficient
funds available or will be permitted by its other debt agreements to repurchase
the Senior Notes upon the occurrence of a Change of Control. In addition, a
Change of Control may require the Company to offer to repurchase other
outstanding indebtedness and may cause a default under the Credit Facility. The
inability to repurchase all of the tendered Senior Notes would constitute an
Event of Default (as defined herein) under the Indenture. See "Description of
the Senior Notes -- Certain Covenants -- Change of Control."
LACK OF PUBLIC MARKET FOR THE SENIOR NOTES
The Senior Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Senior Notes
on any national securities exchange or to seek the admission thereof to trading
in the Nasdaq National Market System. The Company has been advised by the
Underwriters that the Underwriters presently intend to make a market in the
Senior Notes following completion of the Offering. However, the Underwriters are
not obligated to do so and any market-making activities with respect to the
Senior Notes may be discontinued at any time without notice. Accordingly, no
assurance can be given that an active market will develop for the Senior Notes
or as to the liquidity of or the trading market for the Senior Notes. If a
trading market does not develop or is not maintained, holders of the Senior
Notes may experience difficulty in reselling the Senior Notes or may be unable
to sell them at all. If a market for the Senior Notes develops, any such market
may be discontinued at any time. If a public trading market develops for the
Senior Notes, future trading prices of the Senior Notes (which could be at a
discount to the principal amount thereof) will depend on many factors,
including, among other things, prevailing interest rates, the Company's results
of operations and financial condition and the market for similar securities.
15
<PAGE> 16
THE COMPANY
The Company is a leading provider of seismic data acquisition, data
processing, multi-client data surveys, and exploration and development
information services to the oil and gas industry in selected markets worldwide.
The Company was incorporated in Texas in 1965 and was reincorporated in Delaware
in 1969. The Company's principal offices are located at 3701 Kirby Drive,
Houston, Texas 77098, and its telephone number is (713) 512-8300.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Notes offered hereby are
estimated to be $72.2 million. Of this amount, approximately $41.1 million will
be used to retire outstanding indebtedness having a weighted average interest
cost of 9.42% (including borrowings under the Credit Facility). A description of
the interest rates, maturities and other material terms of such indebtedness is
incorporated by reference to Note 7 of Notes to the Supplemental Consolidated
Financial Statements appearing elsewhere in this Prospectus. The remaining $31.1
million will be used to fund a portion of the Company's $67.4 million capital
expenditure budget for fiscal 1997. It is anticipated that the balance of the
fiscal 1997 capital expenditure budget will be financed from internally
generated funds, and, if necessary, from the Credit Facility or other borrowings
permitted by the Indenture. See "Prospectus Summary -- Company Overview,"
"Business -- Technology and Capital Expenditures" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Of the $41.1 million of indebtedness to be retired with a portion of the
proceeds of the Offering, $14.1 million was incurred during the past 12 months
to finance capital expenditures. Subject to the terms of the Credit Facility and
the borrowing limits imposed by the Indenture, the Company may make new
borrowings under the Credit Facility from time to time, including borrowings for
capital expenditure projects and acquisition opportunities in areas related to
the Company's existing lines of business. The Company currently has no plans,
agreements or commitments with respect to any acquisition project.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of July 31, 1996, and as adjusted to reflect the sale of the Senior
Notes offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JULY 31, 1996
------------------------
(UNAUDITED)
AS
ACTUAL ADJUSTED
--------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Long-term debt including current maturities(1):
Revolving credit agreement due July 1998 at prime plus 1/4% (8.50%
at July 31, 1996)............................................... $ 11,458
Secured term loans due July 1999 at interest rates ranging from
prime plus 1/2% to prime plus 3/4% (weighted average rate
8.80% at July 31, 1996)......................................... 10,072
Equipment purchase obligations maturing through July 1999 at an
average rate of 10.28% at July 31, 1996......................... 19,319
Mortgage note payable due October 2005 at 10.00%................... 241
Senior Notes....................................................... $ 75,000
-------- --------
Total long-term debt including current maturities.......... 41,090 75,000
Stockholders' equity................................................. 105,923 105,923
-------- --------
Total capitalization................................................. $ 147,013 $ 180,923
======== ========
</TABLE>
- ---------------
(1) For a further description of the terms of the Company's long-term debt, see
Note 7 of Notes to the Supplemental Consolidated Financial Statements.
17
<PAGE> 18
VERITAS DGC INC. AND SUBSIDIARIES
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected supplemental consolidated financial
data ("Selected Information") for each of the five years in the period ended
July 31, 1996. Such Selected Information for the four years ended July 31, 1996
has been derived from the audited Supplemental Consolidated Financial Statements
of the Company and the related notes thereto. The Supplemental Consolidated
Financial Statements and related notes thereto for the three years ended July
31, 1996 are included elsewhere herein, which statements have been audited by
Deloitte & Touche LLP, independent auditors, whose report is included elsewhere
herein. The Selected Information for the year ended July 31, 1992 has been
derived from the unaudited supplemental consolidated financial statements of the
Company. In the opinion of management, the Selected Information for the year
ended July 31, 1992 includes all adjustments necessary to present fairly the
results of such period.
As a result of the differing year ends of Digicon and VES, results of
operations for dissimilar year ends have been combined. Digicon's results of
operations for fiscal years ended July 31, 1992, 1993, 1994 and 1995 have been
combined with VES' results of operations for fiscal years ended October 31,
1992, 1993, 1994 and 1995, respectively. To conform year ends, Digicon's results
of operations for the year ended July 31, 1996 have been combined with VES'
results of operations for the twelve months ended July 31, 1996. Accordingly,
VES' operating results for the period August 1, 1995 through October 31, 1995
are included in the years ended July 31, 1995 and 1996. An adjustment in an
amount equal to the results of operations for the three-month period is included
in the supplemental consolidated statements of changes in stockholders' equity.
VES' revenues, net income and net income per share were $22,150,000, $936,000
and $.05, respectively, for the period August 1, 1995 through October 31, 1995.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- --------- --------- --------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................................... $ 116,826 $ 146,090 $ 178,392 $ 215,630 $ 250,596
Costs and expenses:
Operating expenses:
Cost of services........................................... 95,022 121,873 144,984 170,424 198,711
Restructuring.............................................. 838
Write-off/write-down for impairment of assets................ 5,235 3,628
Depreciation and amortization................................ 7,836 11,741 19,119 23,732 26,921
Selling, general and administrative.......................... 4,183 4,797 6,296 5,855 7,255
Interest..................................................... 2,579 1,928 3,213 5,170 5,466
Merger related costs......................................... 3,666
Gain on sale of investment in FSU joint ventures............. (4,370)
Other........................................................ 181 (210) (1,833) 232 546
-------- -------- -------- -------- --------
Total.................................................... 109,801 140,129 177,852 201,043 246,193
-------- -------- -------- -------- --------
Income before provision for income taxes and equity in loss of
50% or less-owned companies and joint ventures............... 7,025 5,961 540 14,587 4,403
Provision for income taxes..................................... 1,229 3,183 5,929 3,807 2,009
Equity in loss of 50% or less-owned companies and joint
ventures..................................................... 1,521 2,204 4,965 5,186 1,113
-------- -------- -------- -------- --------
Net income(loss)............................................... $ 4,275 $ 574 $ (10,354) $ 5,594 $ 1,281
======== ======== ======== ======== ========
Net income (loss) per share.................................... $ .46 $ .05 $ (.66) $ .31 $ .07
======== ======== ======== ======== ========
Weighted average shares........................................ 9,378 11,874 15,633 17,771 17,882
======== ======== ======== ======== ========
OTHER DATA:
EBITDA(1)...................................................... $ 17,440 $ 19,630 $ 28,945 $ 39,119 $ 44,084
Pro forma interest expense(2).................................. 8,081
Capital expenditures........................................... 18,157 42,148 29,772 33,634 32,860
Investments in multi-client data library....................... 4,114 5,132 16,019 21,360 14,906
EBITDA/Pro forma interest expense.............................. 5.46x
Consolidated Fixed Charge Coverage Ratio(3).................... 3.95x
Pro forma debt/EBITDA(2)....................................... 1.70x
Ratio of earnings to fixed charges(4)(5)....................... 1.57x 1.44x 0.59x 1.65x 1.22x
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- --------- --------- --------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................................... $ 8,567 $ 5,321 $ 15,545 $ 10,082 $ 10,072
Working capital................................................ 16,362 9,704 16,794 14,830 22,479
Property and equipment -- net.................................. 30,509 60,889 68,423 75,379 79,010
Multi-client data library...................................... 6,578 9,203 18,500 27,976 25,628
Total assets................................................... 93,738 141,464 171,814 184,340 198,592
Long-term debt (including current maturities).................. 17,933 30,890 31,104 36,788 41,090
Stockholders' equity........................................... 46,748 69,380 94,517 98,000 105,923
OPERATING DATA (UNAUDITED):
Land crews in operation........................................ 8 12 16 15 14
Land crews system channels..................................... 6,248 12,740 14,526 17,200 18,708
Marine vessels in operation.................................... 9 7 5 6 7
Marine vessels system channels................................. 2,400 2,160 1,680 1,920 3,840
Data processing centers in operation........................... 13 15 17 17 16
</TABLE>
- ---------------
(1) EBITDA represents income before provision for income taxes and equity in
loss of 50% or less-owned companies and joint ventures plus restructuring
costs plus write-off/write-down for impairment of assets plus depreciation
and amortization plus interest expense plus merger related costs less gain
on sale of investment in FSU joint ventures. EBITDA is presented not as an
alternative measure of operating results or cash flow from operations (as
determined in accordance with generally accepted accounting principles), but
rather to provide additional information related to the debt servicing
ability of the Company.
(2) After giving effect to the issuance of the Senior Notes and the application
of proceeds therefrom.
(3) As defined in "Description of Senior Notes -- Certain
Definitions -- Consolidated Fixed Charge Coverage Ratio."
(4) For the year ended July 31, 1994, earnings were insufficient to cover fixed
charges by $4.4 million.
(5) The effect of the refinancing impacts the ratio of earnings to fixed charges
by less than 10%. Therefore, the pro forma ratio is not presented.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Supplemental Consolidated Financial Statements and Notes thereto and Selected
Supplemental Consolidated Financial Data included elsewhere herein.
RESULTS OF OPERATIONS
Fiscal 1996 Compared with Fiscal 1995
Revenues. For the year ended July 31, 1996, total revenues increased 16%
from $215.6 million to $250.6 million. Land revenues increased 9% from $108.1
million to $117.7 million primarily from increased capacity in Canada and
expansion in the United States and Argentina. Marine revenues increased 66% from
$32.8 million to $54.4 million, primarily resulting from the reassignment of two
vessels to contract work and higher funding levels on multi-client data surveys.
This increase was partially offset by lower prices in the Far East. Data
processing revenue increased 1% from $50.3 million to $50.9 million. Improved
results at the Holland, Singapore and Australia centers were offset by the
closing of the Company's Oklahoma City and Bogota centers and its dedicated
center in Malaysia, and by reduced European data processing prices. Multi-client
data survey revenues increased 16% from $19.8 million to $23.0 million,
resulting from an expansion of the Company's multi-client data library in
response to an increase in demand by oil and gas companies for multi-client data
surveys. Information services revenues increased 5% from $4.4 million to $4.6
million due to a strong Canadian market for such services.
Operating Expenses. Cost of services for the period increased 17% from
$170.4 million to $198.7 million, and, as a percentage of total revenues, costs
of services remained constant at approximately 79%.
Write-off/Write-down for Impairment of Assets. Write-off/write-down for
impairment of assets of $3.6 million relates to mainframe data processing
equipment used in the Company's seismic data processing operations that will be
replaced by more powerful and flexible workstation-based systems by the first
quarter of fiscal 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased 14% from $23.7 million to $26.9 million, due to equipment purchases to
upgrade and expand the Company's operations.
Selling, General and Administrative. Selling, general and administrative
expenses increased 24% from $5.9 million to $7.3 million, resulting primarily
from costs incurred in implementing a new administrative data processing system
and from the addition of staff to support the Company's increasing operations.
Interest. Interest expense increased 6% from $5.2 million to $5.5 million,
resulting primarily from prepayment penalties incurred to pay off a $17.0
million revolving credit agreement.
Merger Related Costs. Merger related costs of $3.7 million consist
primarily of investment banking and professional fees and expenses incurred in
connection with the Combination.
Income Taxes. Provision for income taxes decreased from $3.8 million to
$2.0 million. An $876,000 tax benefit was recognized as a result of taxable
losses in Argentina generated by deductions allowed for social security taxes
and employee compensation and the remainder was due to taxable losses incurred
during expansion into foreign markets.
Equity in Loss. Equity in loss decreased by $4.1 million as a result of the
sale of the FSU joint ventures in 1995 and decreased losses in the Indonesian
joint venture. Equity losses in the Indonesian joint venture decreased as a
result of losses on abandonment of the seismic data processing operations
incurred in 1995.
19
<PAGE> 20
Fiscal 1995 Compared with Fiscal 1994
Revenues. For the fiscal year ended July 31, 1995, total revenues increased
21% from $178.4 million to $215.6 million. Land revenues increased 30% from
$83.2 million to $108.1 million, resulting from increased capacity to satisfy
customer demand in Canada and Argentina. This increase was partially offset by
reduced United States and Far East revenues. Land acquisition revenues in the
Far East declined as a result of the decommissioning of an Australian crew.
Marine revenues decreased 10% from $36.5 million to $32.8 million, resulting
from the derigging of two seismic vessels, lower production from three vessels
due to offshore obstructions and bad weather, and the redeployment of one vessel
from contract work to multi-client data surveys. However, improved market
conditions for 2D surveys continued in the Far East where marine revenues
increased $6.6 million during the current year. Data processing revenues
increased 21% from $41.6 million to $50.3 million resulting from increased
capacity and increased demand at existing centers and the successful opening of
two additional remote site processing centers in Texas and Venezuela during the
year. Multi-client data survey revenues increased 71% from $11.6 million to
$19.8 million, resulting from an expansion of the Company's data library in
response to increased demand by oil and gas companies for multi-client data
surveys.
Operating Expenses. Cost of services increased 18% from $145.0 million to
$170.4 million, primarily resulting from increased operating levels. Cost of
services as a percentage of total revenues declined from 81% to 79% due to
savings from the restructuring program implemented during fiscal 1994 and the
higher profitability associated with multi-client data surveys. These
improvements in margins were partially offset by decreases in Canadian margins
caused by a very weak market in the summer months and by inclement weather
experienced in the United States market by the land seismic acquisition
division. Furthermore, gross margin in the information services division was
reduced due to substantial software development costs which are expensed as
incurred. In fiscal 1994, restructuring charges of $838,000 were recognized,
primarily relating to severance costs associated with a reduction in the
Company's work force.
Depreciation and Amortization. Depreciation and amortization expense
increased 24% from $19.1 million to $23.7 million due to substantial asset
purchases during the current year. Fiscal 1995 also includes decreases in
charges resulting from the prior year's restructuring program of $2.2 million.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 6% from $6.3 million to $5.9 million, primarily resulting
from the accrual in the prior year for benefits payable over five years under an
employment contract with a former executive.
Interest. Interest expense increased 63% from $3.2 million to $5.2 million
as a result of increased borrowings on working capital facilities and equipment
financing, as well as higher borrowing costs.
FSU Joint Ventures. In April 1994, the Company acquired interests in joint
ventures that operate in the FSU. In acquiring these interests, the Company
exchanged common stock and cash commitments valued in excess of the fair market
value of the net assets received. The excess value was to be amortized over a 20
year period, and the Company recorded $392,000 of amortization expense during
fiscal 1995. The joint ventures were in the start-up phase and the Company
recorded $1.5 million of equity losses during fiscal 1995. In June 1995, the
Company disposed of its FSU interests and recorded a $4.4 million gain on sale.
See Note 4 of Notes to the Supplemental Consolidated Financial Statements.
Other. Other (income) expense decreased from income of $1.8 million to an
expense of $232,000. In fiscal 1995, net losses were recorded on the disposition
of property and equipment, partially offset by a gain on the sale of a vessel.
Income recorded in the prior year resulted primarily from a gain on the sale of
a vessel.
Income Taxes. Provision for income taxes decreased from $5.9 million to
$3.8 million in 1995 due to the decrease in taxable income in Canada and the
United States.
20
<PAGE> 21
Equity in Loss. Equity in loss includes losses from the FSU joint ventures
as discussed previously and losses in the Indonesian joint venture.
Fiscal 1994 Compared with Fiscal 1993
Revenues. During the year ended July 31, 1994, total revenues increased 22%
from $146.1 million to $178.4 million. Land revenues increased 83% from $45.5
million to $83.2 million resulting from the addition of three land crews and
other seismic acquisition equipment during 1994. Marine revenues decreased 27%
from $49.9 million to $36.5 million, primarily resulting from the Company
derigging four of its vessels during fiscal 1993 and 1994. Data processing
revenues decreased 1% from $42.1 million to $41.6 million. Higher land activity
levels in Canada and the opening of three additional remote site processing
centers in Texas, Argentina, and Venezuela were offset by lower volumes of
marine acquisition data available for processing caused by excess capacity in
that service group of the industry. Multi-client data survey revenues increased
231% from $3.5 million to $11.6 million in response to increased demand by oil
and gas companies for such surveys. Information services revenues increased 25%
from $3.6 million to $4.5 million due to increased demand for such services.
Operating Expenses. Cost of services increased 19% from $121.9 million to
$145.0 million, primarily resulting from increased operating levels. Cost of
services as a percentage of total revenues decreased from 83% to 81% primarily
due to operating efficiencies. In fiscal 1994, the Company incurred
restructuring charges of $838,000 as previously discussed.
Write-off/Write-down for Impairment of Assets. In fiscal 1994, the Company
recorded $5.2 million in expenses associated with the write-off/write-down of
certain assets including $2.4 million of marine and $552,000 of land acquisition
assets related to decommissioned marine vessels and stacked land crews. The
write-off/write-down also included the write-down of other marine and land
acquisition assets of $1.0 million. In addition, due to decreased activity in
the Far East, the Company wrote down data processing equipment by $1.2 million.
Depreciation and Amortization. Depreciation and amortization expense
increased 63% from $11.7 million to $19.1 million. During fiscal 1993 and 1994,
the Company spent approximately $72.0 million for upgrades to marine vessels,
equipment for new land crews and new processing equipment to enhance its market
position. As a result, depreciation expense for fiscal 1994 increased $7.4
million, net of approximately $500,000 in depreciation savings recognized as a
result of the write-off/write-down for impairment of assets.
Selling, General and Administrative. Selling, general and administrative
expenses increased 31% from $4.8 million to $6.3 million, as a result of
additional staff to support increased activity and expanded international
operations, enhancements to communication and management information systems
infrastructures, and the expensing of severance benefits for a former executive
as previously discussed.
Interest. Interest expense increased 68% from $1.9 million to $3.2 million.
To provide additional working capital during fiscal 1994, the Company obtained a
new revolving credit facility providing advances up to $15.0 million, borrowed
$6.1 million in short-term related party debt (of which $3.4 million was
outstanding for a majority of fiscal 1994) and financed approximately $4.2
million of equipment purchases.
Other. Other income increased from $210,000 to $1.8 million, primarily
resulting from a gain on the sale of a vessel.
Income Taxes. Provision for income taxes increased from $3.5 million to
$5.9 million due to increased taxable income in Canada. Of the total provision
of $5.9 million in 1994, $3.5 million was classified as deferred tax relating
primarily to the corporate structure of the Canadian operations which are
conducted through a partnership. Income generated from the partnership is
deferred for tax purposes by approximately 11 months.
21
<PAGE> 22
Equity in Loss. Equity in loss increased $2.8 million primarily due to
operating losses and expenses incurred by the Indonesian joint venture.
Approximately $1.8 million of the increased expenses related to a restructuring
program initiated in April 1994 in response to continuing operating losses and
poor liquidity of the Indonesian joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are cash balances ($10.1
million at July 31, 1996) and cash flow from operations ($20.1 million for the
year ended July 31, 1996). External sources include the unutilized portion of
the revolving credit facility described below, equipment financing and trade
credit. The Company maintains a $15.0 million revolving credit facility (the
"Credit Facility") with its principal United States commercial bank (the "Bank")
which, as of the date of this Prospectus, provides for borrowings of up to 80%
of the majority of the Company's domestic and foreign receivables (excluding the
receivables of VES) at an interest rate of one-quarter percent over the prime
rate, secured by most of the Company's worldwide assets (excluding the assets of
VES). In connection with the Credit Facility, the Company is limited, without
the consent of the lender, in taking certain actions, including creating
indebtedness in excess of specified amounts; declaring and paying dividends and
is required, among other provisions, to maintain certain financial ratios. The
Credit Facility matures in July 1998.
Subject to the completion of the sale of the Senior Notes, the Bank has
agreed to amend the Credit Facility. The Company will be entitled to borrow up
to $15.0 million on a revolving basis, which will mature in July 1998 and be
secured by substantially all the receivables of the Company. The Bank will
release its existing security interest in assets of the Company other than such
receivables and approve the issuance of the Senior Notes. Pursuant to the
amendment, advances under the Credit Facility will bear interest, at the
Company's election, at LIBOR plus two percent or the prime rate. Advances under
the Credit Facility will be limited by a borrowing formula which, based on
current levels of receivables, results in a borrowing base well in excess of the
maximum commitment. Covenants in the amended Credit Facility will prohibit the
payment of dividends and will limit the Company's capital expenditures in any
fiscal year. In addition, the amended Credit Facility will require minimum cash
flow coverage and the maintenance of minimum tangible net worth; will limit the
ratio of funded debt to total capitalization; and will require the Company to
maintain a minimum current ratio. For information with respect to certain
limitations of the Company's and its subsidiaries' ability to incur
indebtedness, see "Description of Senior Notes -- Certain
Covenants -- Limitation of Indebtedness and Disqualified Capital Stock."
The Company expects that approximately $41.1 million of the net proceeds
from the Offering will be used to retire outstanding indebtedness (including
borrowings under the Credit Facility). The remaining net proceeds will be used
to fund a portion of the Company's $67.4 million capital expenditure budget for
fiscal 1997. It is anticipated that the balance of the 1997 capital expenditure
budget will be financed from internally generated funds, and, if necessary, from
the Credit Facility or other borrowings permitted by the Indenture. See
"Business -- Technology and Capital Expenditures."
The Company requires significant amounts of working capital to support its
operations and to fund its capital spending and research and development
programs. The Company's foreign operations which accounted for 61% of fiscal
1995 revenues and 62% of revenues for the year ended July 31, 1996, require
greater amounts of working capital than similar domestic activities, as the
average collection period of foreign receivables is generally longer than for
comparable domestic accounts. In addition, the Company has increased its
participation in multi-client data surveys and has significantly expanded its
library of multi-client data. Because of the lead time between survey execution
and sale, multi-client data surveys generally require greater amounts of working
capital than contract work. During the first half of the past two fiscal years,
this circumstance was exacerbated as, for budgeting purposes, several clients
deferred payments on data library purchases until January 1995 and 1996,
respectively, at which time substantially all of such receivables were
collected. Depending on the timing of future sales of the
22
<PAGE> 23
data and the collection of the proceeds from such sales, the Company's liquidity
will continue to be affected; however, management believes that these
multi-client data surveys have long-term sales, earnings and cash flow
potential.
The utilization of net operating loss carryforwards ("NOLs") with respect
to the Company is subject to certain limitations. Additionally, when such NOLs
are utilized, the benefit will be recognized as an addition to paid-in capital
and will not be reflected in the consolidated statements of operations.
The Company will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure and research and
development programs, and meet its principal and interest obligations with
respect to the Senior Notes. The Company anticipates that the net proceeds from
the Offering, cash flow generated from operations and borrowings permitted under
the Indenture will provide sufficient liquidity to fund these requirements until
the Senior Notes become due. 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, although there can be no assurance that the
Company will be able to obtain such refinancing or additional financing.
23
<PAGE> 24
BUSINESS
GENERAL
The Company is a leading provider of seismic data acquisition, data
processing, multi-client data surveys, and information services to the oil and
gas industry in selected markets worldwide. Oil and gas companies utilize
seismic data for the determination of suitable locations for drilling
exploratory wells and, increasingly, in reservoir management for the development
and production of oil and gas reserves. The Company acquires seismic data on
land and in transition zone and marine environments, processes data acquired by
its own crews and crews of other operators and provides comprehensive data
management, mapping services and products. The Company acquires seismic data
both on an exclusive contractual basis for its customers and on its own behalf
for licensing to multiple customers on a non-exclusive basis.
To increase its presence in the rapidly expanding market for onshore
geophysical services, the Company recently effected the Combination with VES, a
leading seismic contractor with ten land seismic crews, nine workstation-based
land seismic data processing centers and 800 operating personnel. Pursuant to
the Combination, the Company acquired all of the voting securities of VES in
exchange for the issuance to VES' shareholders of the economic equivalent of
approximately 7.0 million shares of the Company's Common Stock.
Prior to the Combination, the Company initiated a comprehensive program
designed to refocus each of the Company's geographic and operational lines of
business. The Company's actions included: (i) selling its seismic equipment
manufacturing operations; (ii) selling its joint venture interests in the FSU;
(iii) deploying its land and transition zone crews and its marine crews into
markets where the Company's presence would be significant; (iv) expanding its
accumulation and licensing of multi-client data surveys to capitalize on the
historically higher margins associated with non-exclusive data sales; (v)
emphasizing research and development on its proprietary software in order to
capitalize on its reputation for seismic data processing innovation; and (vi)
streamlining its cost structure through personnel reductions, office
consolidations, vessel deactivations and the outsourcing of certain development
and manufacturing functions.
In the current fiscal year, the Company has embarked upon a $67.4 million
capital expenditure program designed to increase its efficiency and improve the
competitive position of its principal products and services and to enable the
Company to capitalize on high-growth/high-margin opportunities in selected
markets.
In its land and transition zone activities, the Company expects to spend
approximately $14.3 million to upgrade and standardize the equipment utilized by
its crews to improve operating efficiency and to provide the capability to
expand its activities in transition zone environments in the United States and
abroad.
In its marine activities, the Company expects to spend approximately $40.0
million to upgrade and add to its multi-streamer vessel capability. This
increased capability is expected to improve operations and to provide increased
multi-client data survey opportunities, particularly in the deep water sectors
of the Gulf of Mexico and the North Sea where demand is expected to grow
significantly.
The Company also expects to spend approximately $11.0 million to upgrade
its data processing equipment and to expand overall data processing capacity to
further enhance its capabilities for sophisticated processing of acquired
seismic data.
INDUSTRY OVERVIEW
Geophysical services enable oil and gas companies to determine whether
subsurface conditions are likely to be favorable for finding new oil and gas
accumulations and assist oil and gas companies in determining the size and
structure of previously identified oil and gas fields. These services consist of
the acquisition and processing of 3D and 2D seismic and other geophysical data,
which is used to
24
<PAGE> 25
produce computer-generated graphic cross-sections and maps of the subsurface
strata. The resulting cross-sections and maps are then analyzed and interpreted
by geophysicists and are used by oil and gas companies in the acquisition of new
leases, the selection of drilling locations on exploratory prospects and in
reservoir development and management.
Geophysical data is acquired by land, transition zone and marine crews. In
data acquisition, a source of acoustical energy is employed at or below the
earth's surface and an acoustical wave is produced through the discharge of
compressed air, the detonation of small explosive charges, or other energy
generating techniques. As the acoustical wave travels through the earth,
portions are reflected by variations in the underlying rock layers, and the
reflected energy is captured by geophones situated at intervals along specified
paths from the point of acoustical impulse. The resulting signals are then
transmitted to a recording unit which amplifies the reflected energy wave and
converts it into digital data. This data is then input into a specialized data
processing system that enhances the recorded signal by reducing noise and
distortion and improving resolution and arranges the input data to produce, with
the aid of plotting devices, an image of the subsurface strata. By interpreting
seismic data, oil and gas companies create detailed maps of prospective areas
and producing oil and gas reservoirs.
Three-dimensional surveys involve the acquisition of a very dense grid of
seismic data over a precisely defined area. This heavy concentration of data
requires extensive computer processing, involving the use of sophisticated
proprietary techniques, to produce an accurate image of the subsurface. Computer
analysis of the 3D survey data allows geophysicists to better examine and
interpret important subsurface features.
Over the last several years, worldwide demand for 3D surveys by major oil
and gas companies and independent producers has increased. The greater precision
and improved subsurface resolution obtainable from 3D seismic data have assisted
oil and gas companies in finding new fields and more accurately delineating
existing fields, as well as enhancing existing reservoir management and
production monitoring techniques. Enhanced subsurface resolution obtainable from
3D studies has been a key factor in improving drilling success ratios and
lowering finding and field extension costs in land, transition zone and marine
environments. This improved technology, coupled with advances in drilling and
completion techniques, are enhancing the industry's ability to develop oil and
gas reserves, particularly in transition zone and deep water environments.
SERVICES AND MARKETS
The Company acquires seismic data in land, transition zone and marine
environments and processes data acquired from its own crews as well as data
acquired by other geophysical crews. The Company currently operates seven land
and transition zone crews in the continental United States, five land crews in
Canada and four land crews in South America, currently in Argentina, Ecuador and
Peru. The Company's seven marine crews operate in selected markets worldwide.
The Company also operates 16 seismic data processing facilities, most of which
are located in major oil and gas centers around the world. In fiscal 1995 and
1996, 61% and 62%, respectively, of the Company's revenues were attributable to
international operations and export sales.
When performing geophysical services under contract for oil and gas
producers, the Company may be employed to acquire and/or process geophysical
data. Under these arrangements, the Company's entire work-product belongs to the
contracting party. The Company also acquires and processes geophysical data for
its own account, preserving its work-product in a data library for later
licensing on a non-exclusive basis. When acquiring data for its library, the
Company generally obtains pre-funding commitments for a majority of the cost of
such surveys from multiple clients.
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<PAGE> 26
The following tables set forth the Company's revenues by service group and
geographical area:
REVENUES BY SERVICE GROUP(1)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------------------------
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Land and transition zone data acquisition...... $ 45,454 $ 83,229 $ 108,133 $ 117,667
Marine data acquisition........................ 49,935 36,509 32,781 54,360
Data processing................................ 42,053 41,591 50,309 50,945
Licensing of multi-client data surveys......... 3,522 11,604 19,804 23,003
Exploration and development information
services..................................... 3,617 4,533 4,378 4,621
Other.......................................... 1,509 926 225
-------- -------- -------- --------
Total................................ $ 146,090 $ 178,392 $ 215,630 $ 250,596
======== ======== ======== ========
</TABLE>
- ---------------
(1) Revenues from data acquisition and data processing services are recognized
based on contractual rates set forth in the related contract if the contract
provides a separate rate for each service group. If the contract only
provides a rate for the overall service, revenues are recognized based on
the percentage of each service groups cost to the total cost.
REVENUES BY GEOGRAPHICAL AREA
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------------------------
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
United States(1)............................... $ 43,773 $ 67,373 $ 87,318 $ 98,875
Canada......................................... 32,244 46,501 44,297 47,423
Europe and Middle East......................... 24,699 29,891 20,230 37,394
Africa......................................... 13,020
Far East....................................... 27,783 16,958 25,918 30,558
South America.................................. 4,571 17,669 37,867 36,346
-------- -------- -------- --------
Total................................ $ 146,090 $ 178,392 $ 215,630 $ 250,596
======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes export sales of $10,138; $1,501; $2,228 and $4,774 in fiscal 1993,
1994, 1995 and 1996, respectively.
See Note 17 of Notes to the Supplemental Consolidated Financial Statements for
additional geographical information.
Geophysical services are marketed from the Company's Houston and Calgary
offices and from its regional administrative centers by personnel whose duties
also typically include technical, supervisory or executive responsibilities.
Contracts are obtained either through competitive bidding in response to
invitations for bids, by direct negotiation with the prospective customer or
through the initiation by the Company of surveys for its data library, which
surveys are then offered for license on a non-exclusive basis.
Contracts for exclusive data acquisition involve payments on either a
turnkey or a time basis or on a combination of both methods. Under the turnkey
method, payments for data acquisition services are based upon the amount of data
collected, and the Company bears substantially all of the risk of business
interruption caused by inclement weather and other hazards. When operating on a
time basis, payments are based on agreed rates per unit of time, which may be
expressed in periods ranging from days to months, and most of the risk of
business interruption (except for interruptions caused by failure of the
Company's equipment) is borne by the customer. When a combination of both
turnkey
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<PAGE> 27
and time methods is used, the risk of business interruptions is shared in an
agreed percentage by the Company and the customer. In each case, progress
payments are usually required unless it is expected that the job can be
accomplished in a brief period. In recent years, the Company's contracts for
data acquisition have been predominantly on a turnkey or on a combination of
turnkey/time basis. Substantially all exclusive data processing work is done on
a turnkey basis.
LAND AND TRANSITION ZONE DATA ACQUISITION
The Company's land and transition zone data acquisition services are
conducted by 16 seismic crews, with a combined seismic recording capacity of
approximately 18,000 channels. Seven of the crews are operating in the
continental United States, five in Canada and four in South American markets.
The Company's land and transition zone crews are equipped to perform both
3D and 2D surveys. Each of the Company's crews consists of a surveying unit
which lays out the lines to be recorded and marks the site for shot-hole
placement or equipment location; an explosives or mechanical vibrating unit (a
vibroseis); and a recording unit that lays out the geophones and recording
instruments, directs shooting operations and records the acoustical signal
reflected from subsurface strata. On the typical land seismic survey, the
seismic crew is supported by several drill crews, which are furnished by third
parties under short-term contracts. Drill crews operate in advance of the
seismic crew and bore shallow holes for explosive charges which, when detonated
by the seismic crew, produce the necessary acoustical impulse. In locations
where the use of explosives is precluded due to population density, technical
requirements or ecological factors, a mechanical vibrating unit or compressed
air is substituted for explosives as the acoustical source. The Company owns 49
vibroseis units which provide 44,000 to 51,000 pounds of energy force.
The Company uses helicopters to aid its crews in seismic data acquisition
in situations where such use will reduce overall costs and/or improve
productivity. In a helicopter-supported project, seismic lines are cut
approximately two meters wide compared to five meters wide when trucks are used
to move cables, geophones and personnel. The use of helicopters, which is often
required in areas with rugged terrain and in agricultural areas, results in
better access and lessened surface damage. In such a project, each seismic crew
is typically supported by one or two helicopters specifically suited to seismic
acquisition requirements.
The Company plans to spend approximately $14.3 million during fiscal 1997
which it believes will provide efficiencies and additional capacity in its land
and transition zone data acquisition operations. Of this amount, approximately
$3.4 million will be used to acquire geophones and cables which will result in
standardization of this equipment so that such equipment will be interchangeable
among the Company's seismic crews. In addition, three of the transition zone
crews have been upgraded to I/O System Two-RSR equipment at a cost of
approximately $6.0 million.
MARINE DATA ACQUISITION
Marine data acquisition services are carried out by the Company's crews
operating from vessels which have been modified or equipped to the Company's
specifications and outfitted with a full complement of seismic, navigational and
communications equipment.
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<PAGE> 28
The following table sets forth certain information concerning the
geophysical vessels operated by the Company as of September 1, 1996:
<TABLE>
<CAPTION>
YEAR
ENTERED SEISMIC RECORDING
VESSEL SERVICE LOCATION LENGTH BEAM CAPACITY (CHANNELS)
- ------------------------------- ------- --------------- ---------- -------- -------------------
<S> <C> <C> <C> <C> <C>
Acadian Searcher(1)............ 1983 Indonesia 217 feet 44 feet 480/3D
Ross Seal(1)................... 1987 Malaysia 176 feet 38 feet 240/3D
Seacor Surf(1)................. 1991 Gulf of Mexico 135 feet 35 feet 240/3D
Polar Search................... 1992 North Sea 300 feet 51 feet 1,920/3D
Pearl Chouest(2)............... 1995 Gulf of Mexico 210 feet 40 feet 240/3D
Cape Romano(1)................. 1996 Gulf of Mexico 155 feet 36 feet 240/3D
Polar Princess................. 1996 North Sea 250 feet 46 feet 480/3D
</TABLE>
- ---------------
(1) Current vessel charter to expire in fiscal 1997.
(2) Current vessel charter to expire in fiscal 1998.
The Polar Search is chartered from a ship operator for an initial term
which expires on January 6, 2000. The vessel has recently been upgraded and
equipped with advanced technology including the capability to simultaneously
record up to eight seismic lines utilizing any combination of up to four Syntrak
480 streamers and two energy sources, as well as the most advanced navigation
and positioning equipment obtainable. The Polar Princess has been chartered from
a ship operator initially on a short-term charter and will acquire primarily
multi-client data. A longer-term charter is currently being negotiated on the
Polar Princess. The Polar Princess is equipped with a Syntron marine digital
telemetry system and one Syntron streamer, and will be upgraded to the latest
technology, a multi-streamer Syntron system, in fiscal 1997.
The Company's other vessels are operated under charter arrangements
expiring at various times throughout fiscal 1997 and 1998. Historically, the
Company has been able to extend its vessel charters on terms and at rates
closely approximating the expiring terms and rates. The Company is reviewing the
charters on the Ross Seal, the Seacor Surf, and the Cape Romano, which expire in
fiscal 1997. Decisions on whether to extend or renew the expiring vessel
charters or enter into charters with other vessel owners are pending and will be
made prior to each charter expiration date.
All of the vessels operated by the Company are equipped to perform both 3D
and 2D seismic surveys. During the last several years, a majority of the marine
seismic data acquisition services performed by the Company involved 3D surveys.
The Company frequently upgrades seismic survey equipment on its vessels to
enhance performance quality and incorporate new technology. Each vessel
generally has an equipment complement consisting of seismic recording
instrumentation, digital seismic streamer cable, cable location and seismic data
location systems, multiple navigation systems, a source control system which
controls the synchronization of the energy source and a firing system which
generates the acoustical impulses. The streamer cable contains hydrophones that
receive the acoustical impulses reflected by variations in the subsurface
strata. Data acquired by each channel in the digital cable is partially
processed before it is transmitted to recording instruments for storage on
magnetic media, thus reducing subsequent processing time and the effective
acquisition costs to the customer.
Vessels with multiple streamers and multiple energy sources acquire more
lines of data with each pass, reducing time to completion and the effective
acquisition cost. At present, only one of the Company's vessels is equipped for
multi-streamer operation. Accordingly, the Company is reviewing options with
respect to its expiring charters, and is considering upgrading vessels and
adding one or more new vessels at an aggregate cost of approximately $34.8
million. The Company presently expects to operate a total of three
multi-streamer vessels in the Gulf of Mexico and the North Sea. These expansions
and upgrades represent the primary portion of the Company's $40.0 million
capital expenditure budget for marine operations in fiscal 1997.
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<PAGE> 29
Each marine seismic crew consists of approximately 20 persons, excluding
the ship's captain and ship personnel. Seismic personnel live aboard ship during
their tours of duty, which are staggered to permit continuous operations. During
seismic operations, the Company's personnel direct the positioning of the vessel
using sophisticated navigational equipment, deploy and retrieve the seismic
streamer cable and energy-source array, and operate all other systems relating
to data collection activities. The Company's personnel do not, however, have
ultimate responsibility for the vessel, which is operated by the captain and
personnel who are employees of the vessel owner.
DATA PROCESSING
The Company currently operates 16 seismic data processing centers,
including two under contract to major oil companies. Seven of the data
processing centers are fully portable, with short set-up times. These centers
allow the Company to meet seismic processing demand in changing international
locations. At each of the centers, data received from the field, both from the
Company and other geophysical crews, is processed to produce an image of the
earth's subsurface using proprietary computer software and techniques developed
by the Company. The Company also reprocesses older seismic data using new
techniques designed to enhance the quality of the data. A majority of the
Company's data processing services are performed on 3D seismic data. The
Company's data processing centers have opened at various times from 1966 through
1996 and are located in Houston, Texas (two locations); Hurst, Texas; Dallas,
Texas; Midland, Texas; Denver, Colorado; Singapore; London, England; Calgary,
Alberta; Brisbane, Australia; Assen, Holland; Jakarta, Indonesia; Kuala Lumpur,
Malaysia; Buenos Aires, Argentina; Neuquen, Argentina; and Caracas, Venezuela.
The Assen center is operated under a customer contract which expires in December
1996. The Company plans to close the Jakarta center in fiscal 1997.
Seven of the Company's centers operate high capacity, advanced technology
data processing systems based on NEC and Hewlett Packard ("HP") computer systems
with high speed networks. These systems utilize the Company's proprietary
software, seismicTANGO, originally developed by Digicon, which is installed on
three marine vessels. The data acquisition crews run seismicTANGO software
identical to that utilized in the NEC and HP systems, allowing for ease in the
movement of data from the field to the data processing centers. The seismicTANGO
software is being used and developed primarily for marine data processing which
involves large projects in comparison with typically smaller scale land data
processing projects.
Nine of the Company's centers process seismic data on Sun workstations.
These systems use SAGE, a proprietary processing system originally developed by
VES. SAGE is being used and developed primarily for land data processing. The
Company intends to continue development of both SAGE and seismicTANGO until such
time as a single software system, utilizing the best features of SAGE and
seismicTANGO, is developed for use in all Company data processing centers.
The Company has dedicated approximately $11.0 million of its fiscal 1997
capital budget to data processing activities. Because of the increased
complexity of processing 3D surveys, the Company plans to retire certain of its
older mainframe equipment and upgrade to more powerful and flexible
workstation-based systems at five of its data processing centers which are
dedicated primarily to processing marine data. In its land processing
operations, the Company is acquiring additional Sun workstations to add capacity
at existing processing centers and to equip two new processing centers. These
expansions and upgrades are expected to increase capacity and lower operating
costs.
LICENSING OF MULTI-CLIENT DATA SURVEYS
In its data acquisition and processing efforts, the Company often acquires
and processes data for its own account through surveys partially or wholly
funded by multiple customers. Once acquired and processed, such surveys are then
licensed for use to other customers on a non-exclusive basis. Factors considered
in determining whether to undertake such surveys include the availability of
initial participants to underwrite a majority of the costs, the location to be
surveyed, the probability and
29
<PAGE> 30
timing of future lease, concession and development activity in the area, and the
availability, quality and price of competing data.
During the past three years, the Company has increased its emphasis on its
multi-client data surveys. During the two year period ended July 31, 1996,
188,642 line miles of new seismic data were added to the Company's library. The
Company expects to continue its emphasis on the licensing of multi-client data
surveys and in fiscal 1997 expects to selectively add additional Gulf of Mexico
and North Sea data to its library. For additional information with respect to
the multi-client data library, see "Risk Factors -- Investment in Multi-Client
Data Surveys."
EXPLORATION AND DEVELOPMENT INFORMATION SERVICES
The Company also provides various exploration and development information
services to the oil and gas industry. These services include data verification
through geophysical survey audit, seismic database management, service bureau
mapping of surface and subsurface oil and gas information, data supply for grid,
culture, wells, pipelines, land and related data sets and mapping systems, as
well as geographical information systems software development.
TECHNOLOGY AND CAPITAL EXPENDITURES
The geophysical industry is highly technical, and the requirements for the
acquisition and processing of seismic data have evolved continuously over the
past 50 years. Accordingly, it is of significance to the Company that its
technological capabilities are comparable or superior to those of its
competitors, whether through continuing research and development, strategic
alliances with equipment manufacturers or by acquiring technology under license
from others. The Company has introduced several technological innovations in its
geophysical service business, which have become industry standard practice in
both acquisition and processing.
Currently, the Company employs approximately 58 persons in its research and
development activities, substantially all of whom are scientists, engineers or
programmers. During fiscal 1994, 1995 and 1996, research and development
expenditures were $5.8 million, $3.6 million and $3.2 million, respectively. The
reduced level of expenditures in fiscal 1995 and 1996 reflects the transfer of
the Company's marine and land engineering department to Syntron, Inc. in August
1994. See Note 6 of Notes to the Supplemental Consolidated Financial Statements.
The Company rarely applies for patents on internally developed technology.
This policy is based upon the belief that most proprietary technology, even
where regarded as patentable, can be more effectively protected by maintaining
confidentiality than through disclosure and a patent enforcement program.
Certain of the equipment, processes and techniques used by the Company are
subject to the patent rights of others, and the Company holds non-exclusive
licenses with respect to a number of such patents. While the Company regards as
beneficial its access to others' technology through licensing, the Company
believes that substantially all presently licensed technology could be replaced
without significant disruption to the business should the need arise.
The capital expenditure program for fiscal 1997 requires expenditures of
approximately $67.4 million and $3.3 million for research and development
activities. The amount of future capital expenditures will depend on the
availability of funding and market requirements as dictated by oil and gas
company activity levels.
30
<PAGE> 31
The following table sets forth a summary of the Company's capital
expenditures for the four years ended July 31, 1996, and its budgeted capital
expenditures for the year ending July 31, 1997.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(BUDGETED)
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Land and transition zone data
acquisition............................ $ 15,992 $ 21,566 $ 18,004 $ 15,020 $ 14,321
Marine data acquisition.................. 19,021 3,370 8,296 7,757 39,979
Data processing.......................... 6,252 3,789 6,064 8,215 11,004
Exploration and development information
services............................... 561 585 431 179 503
Other.................................... 322 462 839 1,689 1,622
-------- -------- -------- -------- --------
Total.......................... $ 42,148 $ 29,772 $ 33,634 $ 32,860 $ 67,429(1)
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Of this amount, approximately $7.7 million represents capital spending
necessary to maintain the Company's operating equipment and the remainder is
for discretionary capital spending, including approximately $26.2 million
for the replacement of older operating equipment with a view to
substantially enhancing operating efficiency and the remaining $33.5 million
for expansion of its equipment complement to meet increased demand for
seismic services.
COMPETITION AND OTHER BUSINESS CONDITIONS
Competition. The acquisition and processing of seismic data for the oil and
gas exploration industry has historically been highly competitive worldwide.
However, as a result of changing technology and increased capital requirements,
the seismic industry has consolidated substantially since the late 1980s. The
consolidation has reduced the number of competitors, and the largest competitors
remaining in the market are Western Geophysical (a division of Western Atlas
Inc.), Geco-Prakla (a division of Schlumberger), Compagnie Generale Geophysique
and Petroleum Geo-Services A/S. Although reliable comparative figures are not
available in all cases, the Company believes that its largest competitors have
more extensive and diversified operations and have financial and operating
resources in excess of those available to the Company. Competition for available
seismic surveys is based on several competitive factors, including price,
performance, dependability, crew experience and equipment availability.
Operating Conditions/Seasonality. The Company's data acquisition activities
often are conducted under extreme weather and other hazardous conditions.
Accordingly, these operations are subject to risks of injury to personnel and
loss of equipment. The Company carries insurance against the destruction of, or
damage to, its chartered vessels and its geophysical equipment in amounts that
it considers adequate. The Company may not, however, be able to obtain insurance
against certain risks or for equipment located from time to time in certain
areas of the world. The Company obtains insurance against war, expropriation,
confiscation and nationalization when such insurance is available and when
management considers it advisable to do so. Such coverage is not always
available and, when available, is subject to unilateral cancellation by the
insuring companies on short notice. The Company also carries insurance against
pollution hazards and injury to persons and property that may result from its
operations and considers the amounts of such insurance to be adequate.
Fixed costs, including costs associated with vessel charters and operating
leases, labor costs, depreciation and interest expense, account for a
substantial percentage of the Company's costs and expenses. As a result,
downtime or low productivity resulting from reduced demand, equipment failures,
weather interruptions or otherwise, can result in significant operating losses.
The Company's seismic operations and quarterly financial results
historically have been subject to seasonal fluctuation, with the greatest volume
of both data acquisition and data processing occurring during the summer and
fall in the Northern Hemisphere. However, as a result of the expansion of the
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<PAGE> 32
Company's foreign operations and the deployment of its seismic vessels and crews
into regions having opposing seasons or less severe weather conditions, the
Company believes that the impact of seasonal fluctuations has been reduced. In
addition to seasonality, the Company historically has experienced quarterly
fluctuations in operating results. Operating results in any fiscal quarter may
vary as a result of (i) the magnitude of certain contracts for the acquisition
or licensing of multi-client data, (ii) customers' budgetary cycles and (iii)
licensing of multi-client data as a result of offshore lease sales. In light of
customer budgetary considerations, the majority of the Company's sales of
multi-client data has historically tended to occur in the Company's first and
second quarters.
BACKLOG
At July 31, 1996, the Company's backlog of commitments for services was
$158.8 million, compared with $139.6 million at July 31, 1995, substantially all
of which was attributable to large-scale, longer duration seismic acquisition
and processing services. Such backlog consisted of written orders or commitments
believed to be firm. Contracts for services are occasionally varied or modified
by mutual consent and in certain instances are cancelable by the customer on
short notice without penalty. Backlog does not reflect land seismic surveys
typical in the North American highlands markets served by VES prior to the
Combination because of the short contract lead times and the smaller scale and
relatively short duration (typically less than one month) of such contracts. As
a result of these factors, the Company's backlog as of any particular date may
not be indicative of the Company's actual operating results for any succeeding
fiscal period. It is anticipated that substantially all of the orders and
commitments included in backlog at July 31, 1996, will be completed within the
next twelve months.
SIGNIFICANT CUSTOMERS
Historically, the Company's principal customers have been international oil
and gas companies, foreign national oil companies and independent oil and gas
companies. Due to the contractual nature of the Company's operations, it is
anticipated that significant portions of future consolidated revenues may be
attributable to a few customers, although it is likely that the identity of such
customers may change from period to period.
EMPLOYEES
At July 31, 1996, the Company employed approximately 2,200 full-time
personnel. With the exception of approximately 39 unionized employees in the
Company's Singapore data processing center, none of its employees are subject to
collective bargaining agreements. The Company considers the relations with its
employees to be good.
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<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The table below sets forth certain information regarding the Company's
executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---------------------------------- --- -------------------------------------------------
<S> <C> <C>
David B. Robson................... 57 Chairman of the Board and Chief Executive
Officer, Director
Stephen J. Ludlow................. 46 President and Chief Operating Officer, Director
Lawrence C. Fichtner.............. 51 Executive Vice President -- Corporate
Communications, Director
Richard W. McNairy................ 56 Executive Vice President, Chief Financial Officer
and Treasurer
Rene M.J. VandenBrand............. 38 Vice President -- Business Development and
Corporate Secretary
George F. Baker................... 57 Director
Clayton P. Cormier................ 64 Director
Ralph M. Eeson.................... 48 Director
Steven J. Gilbert................. 49 Director
Brian F. MacNeill................. 57 Director
Douglas B. Thompson............... 47 Director
Jack C. Threet.................... 68 Director
</TABLE>
David B. Robson. Mr. Robson has been chairman of the board and chief
executive officer of the Company since consummation of the Combination on August
30, 1996. Prior thereto, he had held similar positions with VES or its
predecessors since 1974.
Stephen J. Ludlow. Mr. Ludlow became president and chief operating officer
of the Company in August 1996, upon consummation of the Combination. He was
employed by Digicon for 24 years and served as president and chief executive
officer of Digicon for the preceding two years. Prior to 1994, he served as
executive vice president of Digicon for four years following eight years of
service in a variety of progressively more responsible management positions,
including several years of service as the executive responsible for operations
in Europe, Africa and the Middle East.
Lawrence C. Fichtner. Mr. Fichtner became executive vice
president -- corporate communications of the Company in August 1996, upon
consummation of the Combination. Prior thereto, he had been executive vice
president of VES or its predecessors since 1978. During the ten years prior to
joining VES, he held various positions as a geophysicist with Geophysical
Services Inc., Texas Exploration Ltd. and Bow Valley Exploration Ltd.
Richard W. McNairy. Mr. McNairy was appointed executive vice president,
chief financial officer, and treasurer of the Company in August 1996, upon
consummation of the Combination. He served as vice president and chief financial
officer of Digicon from February 1994 until consummation of the Combination.
Prior to joining Digicon, Mr. McNairy was corporate controller of Halliburton
Energy Services Group for three years and vice president -- finance for its
geophysical services subsidiary for the preceding two years. Prior to 1989 and
since 1974 he was employed in various financial and operational management
capacities with predecessor companies acquired by Halliburton.
Rene M.J. VandenBrand. Mr. VandenBrand became vice president -- business
development and corporate secretary of the Company in August 1996 upon
consummation of the Combination. Prior thereto, he had been vice
president--finance and secretary of VES since November 1995, following two years
of service in comparable positions with Taro Industries Limited. He was
previously a partner of Coopers & Lybrand Chartered Accountants in Calgary.
33
<PAGE> 34
George F. Baker. Mr. Baker has been president of Cambridge Capital
Holdings, Inc., a private investment firm, for more than five years. He also
serves as chairman of the board and president of Whitehall Corporation, a
manufacturer of seismic towed arrays for offshore oil exploration, and through
its Aerocorp subsidiary, is a provider of aircraft maintenance for the airline
industry.
Clayton P. Cormier. Mr. Cormier is currently a financial and insurance
consultant. From 1986 to 1991, Mr. Cormier was a senior vice president in the
oil and gas division of Johnson & Higgins, an insurance broker, and previously
served as chairman of the board, president, and chief executive officer of Ancon
Insurance Company, S.A. and as an assistant treasurer of Exxon Corporation.
Ralph M. Eeson. Mr. Eeson has been co-owner and chairman of the board of
Kids Only Clothing Club Inc., a manufacturer and direct seller of children's
clothing, since 1991. From 1977 to 1991, he was a senior partner at Code Hunter,
Barristers and Solicitors, Calgary. He remains counsel to Code Hunter.
Steven J. Gilbert. Mr. Gilbert has been managing general partner of Soros
Capital L.P. since 1992. Soros Capital L.P. is the principal venture capital and
leveraged transaction entity of Quantum Group of Funds. He is also the managing
director of Commonwealth Capital Partners, L.P., a private entity investment
fund. Mr. Gilbert is a director of Katz Media Group, Inc., NFO Research, Inc.,
The Asian Infrastructure Fund, Peregrine Indonesia Fund, Inc., Terra Nova
(Bermuda) Holdings, Ltd., GTS -- Duratek, Inc., Sydney Harbour Casino Holdings,
Ltd., UroMed, Inc., and Affinity Technology Group, Inc., and is a member of the
Advisory Committee of Donaldson, Lufkin & Jenrette Merchant Banking.
Brian F. MacNeill. Mr. MacNeill has been president and chief executive
officer of IPL Energy Inc., a crude oil and liquids transportation and natural
gas distribution company, formerly Interprovincial Pipe Line, Inc. ("IPL"),
since 1991. He was executive vice president and chief operating officer of IPL
from 1990 to 1991 and previously served as chief financial officer of Interhome
Energy, Inc. and Home Oil Company Limited and as vice president and treasurer of
Hiram Walker Resources Ltd.
Douglas B. Thompson. Mr. Thompson served as chairman of the board of the
Company from May 1994 until consummation of the Combination in August 1996. He
is a private investor and also served as chairman of the board of WellTech,
Inc., a privately-held workover drilling company, until its sale in March 1996.
Jack C. Threet. Mr. Threet was formerly vice president for exploration of
Shell Oil Company. Prior to his retirement from Shell Oil Company in 1987, Mr.
Threet was also a member of the boards of directors of several affiliates of
Shell Oil Company.
34
<PAGE> 35
DESCRIPTION OF SENIOR NOTES
The Senior Notes will be issued under an indenture (the "Indenture") to be
entered into between the Company, as issuer, and Fleet National Bank, as trustee
(the "Trustee"). The terms of the Senior Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Senior Notes
are subject to all such terms, and Holders of Senior Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions of certain terms contained therein. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions."
GENERAL
The Senior Notes will be senior unsecured obligations of the Company
limited to $75 million aggregate principal amount. The Senior Notes will be
issued only in registered form, without coupons, in denominations of $1,000 and
integral multiples thereof. Principal of, premium, if any, and interest on the
Senior Notes will be payable, and the Senior Notes will be transferable, at the
office or agency of the Company maintained for such purposes, which in the case
of payments on the Senior Notes initially will be the corporate trust office or
agency of the Trustee maintained at Shawmut Trust Company, c/o First Chicago
Trust Company of New York, 14 Wall Street, 8th Floor, Window-2, New York, New
York 10005. No service charge will be made for any transfer, exchange or
redemption of the Senior Notes, but the Company or the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be payable in connection therewith.
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Senior Notes will mature on , 2003. Interest on the Senior
Notes will accrue from , 1996 at the rate of % per annum and will
be payable semiannually in cash in arrears on and of each
year, commencing , 1997, to the Persons in whose name the Senior Notes
are registered in the Note Register at the close of business on the
or next preceding such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
REDEMPTION
Optional Redemption. The Senior Notes will be redeemable at the option of
the Company, in whole or in part, at any time on or after , 2000, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest, if any, to the date of redemption (subject to the right of
Holders of record on the relevant record date to receive interest due on an
interest payment date that is on or prior to the date of redemption), if
redeemed during the 12-month period beginning on of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000.............................................................. %
2001.............................................................. %
2002 and thereafter............................................... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to , 1999,
up to $20 million in aggregate principal amount of Senior Notes will be
redeemable, at the option of the Company, from the Net Cash Proceeds of a Public
Equity Offering, at a redemption price equal to % of the principal amount
thereof, together with accrued and unpaid interest to the date of redemption,
provided that at least $55 million in aggregate principal amount of Senior Notes
remains outstanding immediately after
35
<PAGE> 36
such redemption and that such redemption occurs within 60 days following the
closing of such Public Equity Offering.
In the event that less than all of the Senior Notes are to be redeemed, the
particular Senior Notes (or any portion thereof that is an integral multiple of
$1,000) to be redeemed shall be selected not less than 30 nor more than 60 days
prior to the date of redemption by the Trustee, from the outstanding Senior
Notes not previously called for redemption, pro rata, by lot or by any other
method the Trustee shall deem fair and appropriate.
Mandatory Redemption. The Company will not be required to make mandatory
redemption or sinking fund payments with respect to the Senior Notes.
Offers to Purchase. As described below, (a) upon the occurrence of a Change
of Control, the Company will be obligated to make an offer to purchase all
outstanding Senior Notes at a purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase and (b) upon certain sales or other dispositions of assets, the
Company may be obligated to make offers to purchase Senior Notes with a portion
of the Net Available Proceeds of such sales or other dispositions at a purchase
price equal to 100% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. See "-- Certain
Covenants -- Change of Control" and "-- Limitation on Asset Sales."
RANKING
The Senior Notes will be senior unsecured obligations of the Company and
will rank pari passu in right of payment with all other senior Indebtedness of
the Company. The Senior Notes, however, will be effectively subordinated to
secured Indebtedness of the Company with respect to the assets securing such
Indebtedness. At July 31, 1996, the Company had $41.1 million principal amount
of Indebtedness outstanding, all of which will be repaid with the proceeds of
the Offering. Because the Company is a holding company and the Senior Notes are
not guaranteed by any of its Subsidiaries, the Senior Notes are effectively
subordinated to all existing and future liabilities of the Company's
Subsidiaries, including both senior and subordinated Indebtedness of these
Subsidiaries, and regardless of whether such liabilities are secured or
unsecured. Immediately after the Offering, the Subsidiaries will have no
material Indebtedness. Certain of the subsidiaries are co-borrowers under the
Credit Facility. See "Capitalization." Subject to certain limitations, the
Company and its Subsidiaries may incur additional Indebtedness in the future.
See "Risk Factors -- Dependence on Subsidiaries; Holding Company Structure;
Effective Subordination" and "-- Certain Covenants -- Limitation on Indebtedness
and Disqualified Capital Stock."
CERTAIN COVENANTS
The Indenture will contain, among others, the covenants described below.
Limitation on Indebtedness and Disqualified Capital Stock. (a) The Company
will not, and will not permit any of its Restricted Subsidiaries to, create,
incur, issue, assume, guarantee or in any manner become directly or indirectly
liable for the payment of (collectively, "incur") any Indebtedness (including
any Acquired Indebtedness but excluding any Permitted Indebtedness) or any
Disqualified Capital Stock, unless, on a pro forma basis after giving effect to
such incurrence and the application of the proceeds therefrom, the Consolidated
Fixed Charge Coverage Ratio for the four full quarters immediately preceding
such event, taken as one period, would have been equal to or greater than 2.5 to
1.0.
(b) The Company will not incur any Indebtedness that is expressly
subordinated to any other Indebtedness of the Company unless such Indebtedness,
by its terms or the terms of any agreement or instrument pursuant to which such
Indebtedness is issued or outstanding, is also expressly made subordinate to the
Senior Notes at least to the extent it is subordinated to such other
Indebtedness.
(c) The Company will not permit any of its Restricted Subsidiaries to incur
any Indebtedness (excluding Permitted Indebtedness referred to in clauses (i)
and (vi) (to the extent consisting of
36
<PAGE> 37
Indebtedness to the Company) of the definition thereof and Permitted Subsidiary
Indebtedness) or to issue any Preferred Stock.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any other distribution to
holders of, any shares of Capital Stock of the Company (other than
dividends or distributions payable solely in shares of Qualified Capital
Stock of the Company or in options, warrants or other rights to purchase
Qualified Capital Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any Affiliate thereof (other than any
Restricted Subsidiary or except pursuant to a Permitted Investment) or any
options, warrants or other rights to acquire such Capital Stock;
(iii) make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, scheduled sinking fund payment or maturity, any Subordinated
Indebtedness, except in any case out of the Net Cash Proceeds of any
Permitted Indebtedness referred to in clause (ix) of the definition
thereof; or
(iv) make any Restricted Investment;
(such payments or other actions described in clauses (i) through (iv) being
collectively referred to as "Restricted Payments"), unless at the time of and
after giving effect to the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the amount determined by the
Board of Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution),
(1) no Default or Event of Default shall have occurred and be continuing,
(2) the Company could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in accordance with paragraph (a) of the "-- Limitation
on Indebtedness and Disqualified Capital Stock" covenant, and
(3) the aggregate amount of all Restricted Payments declared or made after
the date of the Indenture shall not exceed the sum (without duplication) of the
following:
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period beginning on August 1, 1996 and ending
on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such Consolidated Net
Income is a loss, minus 100% of such loss),
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of shares of Qualified Capital Stock of the
Company or any options, warrants or rights to purchase such shares of
Qualified Capital Stock of the Company,
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase shares of Qualified Capital Stock of the Company,
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of Indebtedness or shares of Disqualified
Capital Stock that have been converted into or exchanged for Qualified
Capital Stock of the Company, together with the aggregate cash received by
the Company at the time of such conversion or exchange,
(E) to the extent not otherwise included in Consolidated Net Income,
the net reduction in Investments in Unrestricted Subsidiaries resulting
from dividends, repayments of loans or ad-
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vances, or other transfers of assets, in each case to the Company or a
Restricted Subsidiary after the date of the Indenture from any Unrestricted
Subsidiary or from the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary (valued in each case as provided in the definition of
Investment), not to exceed in the case of any Unrestricted Subsidiary the
total amount of Investments (other than Permitted Investments) in such
Unrestricted Subsidiary made by the Company and its Restricted Subsidiaries
in such Unrestricted Subsidiary that which was previously treated as a
Restricted Payment, and
(F) $2.5 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (in the case of clauses
(ii) and (iii) below) no Default or Event of Default shall have occurred and be
continuing:
(i) the payment of any dividend on any Capital Stock of the Company or
any Restricted Subsidiary within 60 days after the date of declaration
thereof, if at such declaration date such declaration complied with the
provisions of paragraph (a) above (and such payment shall be deemed to have
been paid on such date of declaration for purposes of any calculation
required by the provisions of paragraph (a) above);
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate Net Cash Proceeds
from, a substantially concurrent issuance and sale (other than to a
Restricted Subsidiary) of shares of Qualified Capital Stock of the Company;
and
(iii) the repurchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness in
exchange for, or out of the aggregate Net Cash Proceeds from, a
substantially concurrent issuance and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company.
The actions described in clauses (i), (ii) and (iii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be made in accordance
with this paragraph (b) but shall reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a), provided
that any dividend paid pursuant to clause (i) of this paragraph (b) shall reduce
the amount that would otherwise be available under clause (3) of paragraph (a)
when declared, but not also when subsequently paid pursuant to such clause (i).
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue
or sell any Capital Stock to any Person other than the Company or a Wholly Owned
Restricted Subsidiary and (ii) will not permit any Person other than the Company
or a Wholly Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, in each case except with respect to a Wholly Owned
Restricted Subsidiary as described in the definition of "Wholly Owned Restricted
Subsidiary." The sale of all of the Capital Stock of any Restricted Subsidiary
is permitted by this covenant but is subject to the limitations described under
"-- Limitations on Asset Sales."
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction unless the Company or such Restricted Subsidiary, as the case may
be, would be able to incur Indebtedness (not including the incurrence of
Permitted Indebtedness) pursuant to and in an amount equal to the Attributable
Indebtedness with respect to such Sale/Leaseback Transaction pursuant to the
covenants described in paragraphs (a) and (c) under "-- Limitation on
Indebtedness and Disqualified Capital Stock," the Company or such Restricted
Subsidiary receives proceeds from such Sale/Leaseback Transaction at least equal
to the fair market value of the property or assets subject thereto (as
determined in good faith by the Company's Board of Directors, whose
determination in good faith and evidenced by a Board Resolution will be
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<PAGE> 39
conclusive) and the Company applies an amount in cash equal to the Net Available
Proceeds of the Sale/Leaseback Transaction in accordance with the provisions of
the "Limitation on Asset Sales" covenant as if such Sale/Leaseback Transaction
were an Asset Sale.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets or property
or the rendering of any services) with, or for the benefit of, any Affiliate of
the Company (other than the Company or a Restricted Subsidiary), unless (i) such
transaction or series of transactions is on terms that are no less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
would be available in a comparable arm's length transaction with unrelated third
parties, (ii) with respect to any one transaction or series of related
transactions involving aggregate payments in excess of $1.0 million but less
than $5.0 million in the aggregate, the Company delivers an Officers'
Certificate to the Trustee certifying that (A) such transaction or series of
related transactions complies with clause (i) above and (B) such transaction or
series of related transactions has been approved by the Board of Directors
(including a majority of the Disinterested Directors) of the Company, and (iii)
with respect to any one transaction or series of related transactions involving
aggregate payments in excess of $5.0 million, the Company delivers an Officers'
Certificate to the Trustee certifying to the two matters referred to in clause
(ii) above and that the Company has obtained a written opinion from an
independent nationally recognized investment banking firm or appraisal firm
specializing or having a speciality in the type and subject matter of the
transaction or series of related transactions at issue, which opinion shall be
to the effect set forth in clause (i) above or shall state that such transaction
or series of related transactions is fair from a financial point of view to the
Company or such Restricted Subsidiary; provided, however, that the foregoing
restriction shall not apply to (w) loans or advances to officers, directors and
employees of the Company or any Restricted Subsidiary made in the ordinary
course of business and consistent with past practices of the Company and its
Restricted Subsidiaries in an aggregate amount not to exceed $1.0 million
outstanding at any one time, (x) indemnities of officers, directors and
employees of the Company or any Restricted Subsidiary permitted by bylaw or
statutory provisions, (y) the payment of reasonable and customary regular fees
to directors of the Company or any of its Restricted Subsidiaries who are not
employees of the Company or any Affiliate and (z) the Company's employee
compensation and other benefit arrangements.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm
or suffer to exist or become effective any Lien of any kind, except for
Permitted Liens, upon any of their respective property or assets, whether now
owned or acquired after the date of the Indenture, or any income, profits or
proceeds therefrom, to secure any Indebtedness of the Company or such Restricted
Subsidiary, unless prior to, or contemporaneously therewith, the Senior Notes
are equally and ratably secured; provided, however, that if such Indebtedness is
expressly subordinated to the Senior Notes, the Lien securing such Indebtedness
will be subordinated and junior to the Lien securing the Senior Notes, with the
same relative priority as such Indebtedness has with respect to the Senior
Notes. The foregoing covenant will not apply to any Lien securing Acquired
Indebtedness, provided that any such Lien extends only to the property or assets
that were subject to such Lien prior to the related acquisition by the Company
or such Restricted Subsidiary and was not created, incurred or assumed in
contemplation of such transaction. The incurrence of additional secured
Indebtedness by the Company and its Restricted Subsidiaries is subject to
further limitations on the incurrence of Indebtedness as described under
"-- Limitation on Indebtedness and Disqualified Capital Stock."
Change of Control. Upon the occurrence of a Change of Control, the Company
will be obligated to make an offer to purchase all of the then outstanding
Senior Notes (a "Change of Control Offer"), and will purchase, on a Business Day
(the "Change of Control Purchase Date"), not more than 60 nor less than 30 days
following such Change of Control, all of the then outstanding Senior Notes
validly tendered pursuant to such Change of Control Offer and not withdrawn, at
a purchase price (the
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<PAGE> 40
"Change of Control Purchase Price") equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Purchase Date. The Change of Control Offer is required to remain open for at
least 20 Business Days and until the close of business on the fifth Business Day
prior to the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company will, not
later than the 30th day after the Change of Control, mail to the Trustee and
each Holder a notice of the Change of Control Offer, which notice shall govern
the terms of the Change of Control Offer and shall state, among other things,
the procedures that Holders must follow to accept the Change of Control Offer.
The occurrence of a Change of Control may result in lenders under the
Credit Facility having the right to require the Company to repay all
Indebtedness outstanding thereunder. There can be no assurance that the Company
will have available funds sufficient to repay all Indebtedness owing under the
Credit Facility or to fund the purchase of the Senior Notes upon a Change of
Control. In the event a Change of Control occurs at a time when the Company does
not have available funds sufficient to pay the Change of Control Purchase Price
for all of the Senior Notes delivered by Holders seeking to accept the Change of
Control Offer, an Event of Default would occur under the Indenture. The
definition of Change of Control includes an event by which the Company sells,
conveys, transfers, leases or otherwise disposes of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries, taken
as a whole; the phrase "all or substantially all" is subject to applicable legal
precedent and, as a result, in the future there may be uncertainty as to whether
or not a Change of Control has occurred.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if another Person makes the Change of Control Offer at the
same purchase price, at the same time and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer to be made by the
Company and purchases all Senior Notes validly tendered and not withdrawn under
such Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder, if applicable, in the event
that a Change of Control occurs and the Company is required to purchase Senior
Notes as described above. The existence of a Holder's right to require, subject
to certain conditions, the Company to repurchase its Senior Notes upon a Change
of Control may deter a third party from acquiring the Company in a transaction
that constitutes, or results in, a Change of Control.
Limitation on Asset Sales. (a) The Company will not, and will not permit
any Restricted Subsidiary to, engage in any Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
and properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination in good
faith shall be conclusive and evidenced by a Board Resolution), (ii) at least
80% of the consideration received by the Company or the Restricted Subsidiary,
as the case may be, in respect of such Asset Sale consists of cash or Cash
Equivalents and (iii) the Company delivers to the Trustee an Officers'
Certificate certifying that such Asset Sale complies with clauses (i) and (ii).
The amount (without duplication) of any Indebtedness (other than Subordinated
Indebtedness) of the Company or such Restricted Subsidiary that is expressly
assumed by the transferee in such Asset Sale and with respect to which the
Company or such Restricted Subsidiary, as the case may be, is unconditionally
released by the holder of such Indebtedness, shall be deemed to be cash or Cash
Equivalents for purposes of clause (ii) and shall also be deemed to constitute a
repayment of, and a permanent reduction in, the amount of such Indebtedness for
purposes of the following paragraph.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company or any Restricted Subsidiary may either, no later than 270 days
after such Asset Sale, (i) apply all or any of the Net Available Proceeds
therefrom to repay Indebtedness (other than Subordinated Indebtedness) of the
Company or any Restricted Subsidiary, provided, in each case, that the related
loan commitment
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<PAGE> 41
(if any) is thereby permanently reduced by the amount of such Indebtedness so
repaid, or (ii) invest all or any part of the Net Available Proceeds thereof in
properties and assets that replace the properties or assets that were the
subject of such Asset Sale or in other properties or assets that will be used in
the business of the Company and its Restricted Subsidiaries. The amount of such
Net Available Proceeds not applied or invested as provided in this paragraph
will constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds $5.0
million, the Company will be required to make an offer to purchase, from all
Holders of the Notes, an aggregate principal amount of Senior Notes equal to
such Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Senior Notes in accordance with the
procedures set forth in the Indenture the maximum principal amount
(expressed as a multiple of $1,000) of Senior Notes that may be purchased
out of the amount (the "Payment Amount") of such Excess Proceeds.
(ii) The offer price for the Senior Notes will be payable in cash in
an amount equal to 100% of the principal amount of the Senior Notes
tendered pursuant to a Net Proceeds Offer, plus accrued and unpaid
interest, if any, to the date such Net Proceeds Offer is consummated (the
"Offered Price"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate Offered Price of the Senior
Notes tendered pursuant to a Net Proceeds Offer is less than the Payment
Amount relating thereto (such shortfall constituting a "Net Proceeds
Deficiency"), the Company may use such Net Proceeds Deficiency, or a
portion thereof, for general corporate purposes, subject to the limitations
of the "Limitation on Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis.
(iv) Upon completion of such Net Proceeds Offer, the amount of Excess
Proceeds shall be reset to zero.
The Company will not permit any Restricted Subsidiary to enter into or suffer to
exist any agreement that would place any restriction of any kind (other than
pursuant to law or regulation) on the ability of the Company to make a Net
Proceeds Offer following any Asset Sale. The Company will comply with Rule 14e-1
under the Exchange Act, and any other securities laws and regulations
thereunder, if applicable, in the event that an Asset Sale occurs and the
Company is required to purchase Senior Notes as described above.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or suffer to exist or allow to
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary (a) to pay dividends, in cash or otherwise,
or make any other distributions on its Capital Stock, or make payments on any
Indebtedness owed, to the Company or any other Restricted Subsidiary, (b) to
make loans or advances to the Company or any other Restricted Subsidiary, (c) to
transfer any of its property or assets to the Company or any other Restricted
Subsidiary or (d) to guarantee the Senior Notes (any such restrictions being
collectively referred to herein as a "Payment Restriction"), except in any such
case for such encumbrances or restrictions existing under or by reason of (i)
the Indenture, the Credit Facility or any other agreement in effect or entered
into on the date of the Indenture, or (ii) any agreement, instrument or charter
of or in respect of a Restricted Subsidiary entered into prior to the date on
which such Restricted Subsidiary became a Restricted Subsidiary and outstanding
on such date and not entered into in connection with or in contemplation of
becoming a Restricted Subsidiary, provided such consensual encumbrance or
restriction is not applicable to any properties or assets other than those owned
or held by the Restricted Subsidiary at the time it became a Restricted
Subsidiary or subsequently acquired by such Restricted Subsidiary other than
from the Company or any other Restricted Subsidiary, or (iii) pursuant to an
agreement effecting a modification, renewal, refinancing, replacement or
extension of any agreement, instrument or charter (other than the Indenture)
referred to in clause (i) or (ii) above, provided,
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however, that the provisions relating to such encumbrance or restriction are not
materially less favorable to the Holders of the Senior Notes than those under or
pursuant to the agreement, instrument or charter so modified, renewed,
refinanced, replaced or extended, or (iv) customary provisions restricting the
subletting or assignment of any lease or the transfer of copyrighted or patented
materials, or (v) provisions in agreements that restrict the assignment of such
agreements or rights thereunder, or (vi) the sale or other disposition of any
properties or assets subject to a Lien securing Indebtedness.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the business being conducted on the date of the Indenture
(and described therein and herein) and such other businesses as are reasonably
necessary or desirable to facilitate the conduct and operation of such
businesses.
Reports. The Company will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, the annual
reports, quarterly reports and other documents that the Company would be
required to file if it were subject to Section 13 or 15 of the Exchange Act. The
Company will also be required (a) to file with the Trustee (with exhibits), and
provide to each Holder of Senior Notes (without exhibits), without cost to such
Holder, copies of such reports and documents within 15 days after the date on
which the Company files such reports and documents with the Commission or the
date on which the Company would be required to file such reports and documents
if the Company were so required and (b) if filing such reports and documents
with the Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at its cost copies of such reports and documents
(including any exhibits thereto) to any Holder of Senior Notes promptly upon
written request.
Future Designation of Restricted and Unrestricted Subsidiaries. The
foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may be
affected by the designation by the Company of any existing or future Subsidiary
of the Company as an Unrestricted Subsidiary. The definition of "Unrestricted
Subsidiary" set forth under the caption "-- Certain Definitions" describes the
circumstances under which a Subsidiary of the Company may be designated as an
Unrestricted Subsidiary by the Board of Directors of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in any single transaction or series of related
transactions, merge or consolidate with or into any other Person, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any Person or group of Affiliated Persons, and the Company
will not permit any of its Restricted Subsidiaries to enter into any such
transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any other Person or group of Affiliated Persons, unless at
the time and after giving effect thereto (i) either (A) if the transaction is a
merger or consolidation, the Company shall be the surviving Person of such
merger or consolidation, or (B) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which the
properties and assets of the Company or its Restricted Subsidiaries, as the case
may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed
of (any such surviving Person or transferee Person being the "Surviving Entity")
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall, in
either case, expressly assume by a supplemental indenture to the Indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Senior Notes and the Indenture, and, in
each case, the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any Indebtedness not previously
an obligation of the
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Company or any of its Restricted Subsidiaries which becomes an obligation of the
Company or any of its Restricted Subsidiaries in connection with or as a result
of such transaction or transactions as having been incurred at the time of such
transaction or transactions), no Default or Event of Default shall have occurred
and be continuing; (iii) except in the case of the consolidation or merger of
any Restricted Subsidiary with or into the Company, immediately after giving
effect to such transaction or transactions on a pro forma basis, the
Consolidated Net Worth of the Company (or the Surviving Entity if the Company is
not the continuing obligor under the Indenture) is at least equal to the
Consolidated Net Worth of the Company immediately before such transaction or
transactions; (iv) except in the case of the consolidation or merger of the
Company with or into a Restricted Subsidiary or any Restricted Subsidiary with
or into the Company or another Restricted Subsidiary, immediately before and
immediately after giving effect to such transaction or transactions on a pro
forma basis (assuming that the transaction or transactions occurred on the first
day of the period of four fiscal quarters ending immediately prior to the
consummation of such transaction or transactions, with the appropriate
adjustments with respect to the transaction or transactions being included in
such pro forma calculation), the Company (or the Surviving Entity if the Company
is not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
first paragraph of the "-- Limitation on Indebtedness and Disqualified Capital
Stock" covenant; (v) if any of the properties or assets of the Company or any of
its Restricted Subsidiaries would upon such transaction or series of related
transactions become subject to any Lien (other than a Permitted Lien), the
creation and imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant; and (vi) the Company (or the Surviving Entity if
the Company is not the continuing obligor under the Indenture) shall have
delivered to the Trustee, in form and substance reasonably satisfactory to the
Trustee, (a) an Officers' Certificate stating that such consolidation, merger,
transfer, lease or other disposition and any supplemental indenture in respect
thereto comply with the requirements under the Indenture and (b) an Opinion of
Counsel stating that the requirements of clause (i) of this paragraph have been
satisfied.
Upon any consolidation or merger or any sale, assignment, lease,
conveyance, transfer or other disposition of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis in accordance with the foregoing, in which the Company is not
the continuing corporation, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if the Surviving Entity had been named as
the Company therein, and thereafter the Company, except in the case of a lease,
will be discharged from all obligations and covenants under the Indenture and
the Senior Notes and may be liquidated and dissolved.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any, on
any of the Senior Notes, whether such payment is due at Stated Maturity,
upon redemption, upon repurchase pursuant to a Change of Control Offer or a
Net Proceeds Offer, upon acceleration or otherwise; or
(ii) default in the payment of any installment of interest on any of
the Senior Notes, when due, and the continuance of such default for a
period of 30 days; or
(iii) default in the performance or breach of the provisions of the
"Merger, Consolidation and Sale of Assets" section of the Indenture, the
failure to make or consummate a Change of Control Offer in accordance with
the provisions of the "Change of Control" covenant or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of the
"Limitation on Asset Sales" covenant; or
(iv) the Company shall fail to perform or observe any other term,
covenant or agreement contained in the Senior Notes or the Indenture (other
than a default specified in (i), (ii) or (iii) above) for a period of
30 days after written notice of such failure stating that it is a "notice
of
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default" under the Indenture and requiring the Company to remedy the same
shall have been given (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Senior Notes then outstanding; or
(v) the occurrence and continuation beyond any applicable grace period
of any default in the payment of the principal of, premium, if any, or
interest on any Indebtedness of the Company (other than the Senior Notes)
or any Restricted Subsidiary for money borrowed when due, or any other
default resulting in acceleration of any Indebtedness of the Company or any
Restricted Subsidiary for money borrowed, provided that the aggregate
principal amount of such Indebtedness shall exceed $5.0 million and
provided, further, that if any such default is cured or waived or any such
acceleration rescinded, or such Indebtedness is repaid, within a period of
10 days from the continuation of such default beyond the applicable grace
period or the occurrence of such acceleration, as the case may be, such
Event of Default under the Indenture and any consequential acceleration of
the Senior Notes shall be automatically rescinded, so long as such
rescission does not conflict with any judgment or decree; or
(vi) final judgments or orders rendered against the Company or any
Restricted Subsidiary that are unsatisfied and that require the payment in
money, either individually or in an aggregate amount, that is more than
$5.0 million over the coverage under applicable insurance policies and
either (A) commencement by any creditor of an enforcement proceeding upon
such judgment (other than a judgment that is stayed by reason of pending
appeal or otherwise) or (B) the occurrence of a 30-day period during which
a stay of such judgment or order, by reason of pending appeal or otherwise,
was not in effect; or
(vii) the entry of a decree or order by a court having jurisdiction in
the premises (A) for relief in respect of the Company or any Restricted
Subsidiary in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar
law or (B) adjudging the Company or any Restricted Subsidiary bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of the Company or any Restricted Subsidiary under
any applicable federal or state law, or appointing under any such law a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Restricted Subsidiary or of a
substantial part of its consolidated assets, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or order
for relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days; or
(viii) the commencement by the Company or any Restricted Subsidiary of
a voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any other
case or proceeding to be adjudicated bankrupt or insolvent, or the consent
by the Company or any Restricted Subsidiary to the entry of a decree or
order for relief in respect thereof in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by
the Company or any Restricted Subsidiary of a petition or consent seeking
reorganization or relief under any applicable federal or state law, or the
consent by it under any such law to the filing of any such petition or to
the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or other similar official)
of the Company or any Restricted Subsidiary or of any substantial part of
its consolidated assets, or the making by it of an assignment for the
benefit of creditors under any such law, or the admission by it in writing
of its inability to pay its debts generally as they become due or taking of
corporate action by the Company or any Restricted Subsidiary in furtherance
of any such action.
If an Event of Default (other than as specified in clause (vii) or (viii)
above) shall occur and be continuing, the Trustee, by written notice to the
Company, or the Holders of at least 25% in aggregate principal amount of the
Senior Notes then outstanding, by written notice to the Trustee and the
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Company, may, and the Trustee upon the request of the Holders of not less than
25% in aggregate principal amount of the Senior Notes then outstanding shall,
declare the principal of, premium, if any, and accrued and unpaid interest on
all of the Senior Notes due and payable immediately, upon which declaration all
amounts payable in respect of the Senior Notes shall be immediately due and
payable. If an Event of Default specified in clause (vii) or (viii) above occurs
and is continuing, then the principal of, premium, if any, and accrued and
unpaid interest on all of the Senior Notes shall become and be immediately due
and payable without any declaration, notice or other act on the part of the
Trustee or any Holder of Senior Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Senior Notes, by written notice to the Company and the Trustee, may
rescind and annul such declaration if (a) the Company has paid or deposited with
the Trustee a sum sufficient to pay (i) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
all Senior Notes, (iii) the principal of and premium, if any, on any Senior
Notes which have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the Senior Notes, and (iv) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Senior Notes (without duplication
of any amount paid or deposited pursuant to clause (ii) or (iii)); (b) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the
non-payment of principal of, premium, if any, or interest on the Senior Notes
that has become due solely by such declaration of acceleration, have been cured
or waived.
No Holder will have any right to institute any proceeding with respect to
the Indenture or any remedy thereunder, unless such Holder has notified the
Trustee of a continuing Event of Default and the Holders of at least 25% in
aggregate principal amount of the outstanding Senior Notes have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as Trustee under the Senior Notes and the Indenture, the Trustee has
failed to institute such proceeding within 60 days after receipt of such notice
and the Trustee, within such 60-day period, has not received directions
inconsistent with such written request by Holders of a majority in aggregate
principal amount of the outstanding Senior Notes. Such limitations will not
apply, however, to a suit instituted by the Holder of a Senior Note for the
enforcement of the payment of the principal of, premium, if any, or interest on
such Senior Note on or after the respective due dates expressed in such Senior
Note.
During the existence of an Event of Default, the Trustee will be required
to exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the Holders of a
majority in aggregate principal amount of the outstanding Senior Notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee under the Indenture.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each Holder notice of the Default or
Event of Default within 60 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of, premium, if any,
or interest on any Senior Notes, the Trustee may withhold the notice to the
Holders of the Senior Notes if the Trustee determines in good faith that
withholding the notice is in the interest of the Holders of the Senior Notes.
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The Company will be required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company will also be
required to notify the Trustee within 10 days of any Default or Event of
Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company with respect to the outstanding Senior Notes (such action being a
"legal defeasance"). Such legal defeasance means that the Company shall be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Senior Notes and to have been discharged from all their other
obligations with respect to the Senior Notes, except for (i) the rights of
Holders of outstanding Senior Notes to receive payment in respect of the
principal of, premium, if any, and interest on such Senior Notes when such
payments are due, (ii) the Company's obligations to replace any temporary Senior
Notes, register the transfer or exchange of any Senior Notes, replace mutilated,
destroyed, lost or stolen Senior Notes and maintain an office or agency for
payments in respect of the Senior Notes, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and (iv) the legal defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to terminate the obligations of the Company with respect to certain
covenants that are set forth in the Indenture, some of which are described under
" --Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Senior
Notes (such action being a "covenant defeasance"). In the event covenant
defeasance occurs, certain events (not including nonpayment, bankruptcy,
insolvency and reorganization events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Senior Notes.
In order to exercise either legal defeasance or covenant defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in United States dollars, U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding Senior Notes to redemption or maturity;
(ii) the Company shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such legal
defeasance or covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such legal defeasance or covenant defeasance had not occurred (in
the case of legal defeasance, such opinion must refer to and be based upon a
published ruling of the Internal Revenue Service or a change in applicable
federal income tax laws); (iii) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or insofar as clauses
(vii) and (viii) under the first paragraph of "Events of Default" are concerned,
at any time during the period ending on the 91st day after the date of deposit;
(iv) such legal defeasance or covenant defeasance shall not cause the Trustee to
have a conflicting interest under the Indenture or the Trust Indenture Act with
respect to any securities of the Company; (v) such legal defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under, any material agreement or instrument to which the Company is a party or
by which it is bound; and (vi) the Company shall have delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel satisfactory to the Trustee,
which, taken together, state that all conditions precedent under the Indenture
to either legal defeasance or covenant defeasance, as the case may be, have been
complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Senior Notes, as expressly provided for in the Indenture)
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as to all outstanding Senior Notes when (i) either (a) all the Senior Notes
theretofore authenticated and delivered (except lost, stolen, mutilated or
destroyed Senior Notes which have been replaced or paid and Senior Notes for
whose payment money or certain United States government obligations have
theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust) have
been delivered to the Trustee for cancellation or (b) all Senior Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable or will become due and payable at their Stated Maturity within one year,
or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the serving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the Senior
Notes not theretofore delivered to the Trustee for cancellation, for principal
of, premium, if any, and interest on the Senior Notes to the date of deposit (in
the case of Senior Notes which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be, together with instructions from
the Company irrevocably directing the Trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be; (ii) the Company has paid
all other sums payable under the Indenture by the Company; and (iii) the Company
has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel
which, taken together, state that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENTS AND WAIVERS
From time to time, the Company and the Trustee may, without the consent of
the Holders of the Senior Notes, amend or supplement the Indenture or the Senior
Notes for certain specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, qualifying, or maintaining the
qualification of, the Indenture under the Trust Indenture Act or making any
change that does not materially adversely affect the rights of any Holder of
Senior Notes. Other amendments and modifications of the Indenture or the Senior
Notes may be made by the Company and the Trustee with the consent of the Holders
of not less than a majority of the aggregate principal amount of the outstanding
Senior Notes; provided, however, that no such modification or amendment may,
without the consent of the Holder of each outstanding Senior Note affected
thereby, (a) change the Stated Maturity of the principal of, or any installment
of interest on, any Senior Note, (b) reduce the principal amount of, premium, if
any, or interest on any Senior Note, (c) change the coin or currency of payment
of principal of, premium, if any, or interest on, any Senior Note, (d) impair
the right to institute suit for the enforcement of any payment on or with
respect to any Senior Note, (e) reduce the above-stated percentage of aggregate
principal amount of outstanding Senior Notes necessary to modify or amend the
Indenture, (f) reduce the percentage of aggregate principal amount of
outstanding Senior Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (g) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or the waiver of past defaults or covenants, except as otherwise
specified, (h) change the ranking of the Senior Notes in a manner adverse to the
Holders or expressly subordinate in right of payment the Senior Notes to any
other Indebtedness or (i) amend, change or modify the obligation of the Company
to make and consummate a Change of Control Offer in the event of a Change of
Control or make and consummate a Net Proceeds Offer with respect to any Asset
Sale or modify any of the provisions or definitions with respect thereto.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Senior Notes may, on behalf of the Senior Holders of all Notes,
waive any past default under the Indenture, except a default in the payment of
principal of, premium, if any, or interest on the Senior Notes, or in respect of
a covenant or provision which under the Indenture cannot be modified or amended
without the consent of the Holder of each Senior Note outstanding.
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THE TRUSTEE
Fleet National Bank will serve as trustee under the Indenture.
The Indenture (including provisions of the Trust Indenture Act incorporated
by reference therein) will contain limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Indenture will permit
the Trustee to engage in other transactions; provided, however, if it acquires
any conflicting interest (as defined in the Trust Indenture Act) it must
eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Senior Notes will be governed by the laws of the
State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with acquisitions of properties or assets from such Person (other than any
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition). Acquired Indebtedness
shall be deemed to be incurred on the date the acquired Person becomes a
Restricted Subsidiary or the date of the related acquisition of properties or
assets from such Person.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this definition, beneficial ownership of 10% or more of the voting
common equity (on a fully diluted basis) or options or warrants to purchase such
equity (but only if exercisable at the date of determination or within 60 days
thereof) of a Person shall be deemed to constitute control of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a Sale/Leaseback
Transaction or a merger or consolidation) (collectively, for purposes of this
definition, a "transfer"), directly or indirectly, in one or a series of related
transactions, of (a) any Capital Stock of any Restricted Subsidiary held by the
Company or any other Restricted Subsidiary, (b) all or substantially all of the
properties and assets of any division or line of business of the Company or any
of its Restricted Subsidiaries or (c) any other properties or assets of the
Company or any of its Restricted Subsidiaries other than transfers of cash, Cash
Equivalents, accounts receivable or other properties or assets in the ordinary
course of business or transfers in accordance with the proviso to clause (vi) of
the definition of Permitted Investments. For the purposes of this definition,
the term "Asset Sale" also shall not include any of the following: (i) any
transfer of properties or assets (including Capital Stock) that is governed by,
and made in accordance with, the provisions described under "-- Merger,
Consolidation and Sale of Assets"; (ii) any transfer of properties or assets to
an Unrestricted Subsidiary, if permitted under the "Limitation on Restricted
Payments" covenant; (iii) sales of damaged, worn-out or obsolete equipment or
assets that, in the Company's reasonable judgment, are either (x) no longer used
or (y) no longer useful in the business of the Company or its Restricted
Subsidiaries; (iv) any lease of any property entered into in the ordinary course
of business and with respect to which the Company or any Restricted Subsidiary
is the lessor, except any such lease that provides for the acquisition of such
property by the lessee during or at the end of the term thereof for an amount
that is less than the fair market value thereof at the time the right to acquire
such property is granted; and (v) any transfers that, but for this clause (v),
would be Asset Sales, if (A) the
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Company elects to designate such transfers as not constituting Asset Sales and
(B) after giving effect to such transfers, the aggregate fair market value of
the properties or assets transferred in such transaction or any such series of
related transactions so designated by the Company does not exceed $500,000.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable, whether or not accounted for as a
Capitalized Lease Obligation, and at any date as of which the amount thereof is
to be determined, the present value of the total net amount of rent required to
be paid by such Person under the lease during the primary term thereof, without
giving effect to any renewals at the option of the lessee, discounted from the
respective due dates thereof to such date of determination at a rate per annum
equal to the discount rate which would be applicable to a Capitalized Lease
Obligation with a like term in accordance with GAAP. As used in the preceding
sentence, the "net amount of rent" under any such lease for any such period
shall mean the sum of rental and other payments required to be paid with respect
to such period by the lessee thereunder, excluding any amounts required to be
paid by such lessee on account of maintenance and repairs, insurance, taxes,
assessments, water rates or similar charges. In the case of any lease which is
terminable by the lessee upon payment of a penalty, such net amount of rent
shall also include the amount of such penalty, but no rent shall be considered
as required to be paid under such lease subsequent to the first date upon which
it may be so terminated.
"Average Life" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund or mandatory redemption payment
requirements) of such Indebtedness multiplied by (ii) the amount of each such
principal payment by (b) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents in the equity interests
(however designated) in such Person, and any rights (other than debt securities
convertible into an equity interest), warrants or options exercisable for,
exchangeable for or convertible into such an equity interest in such Person (for
purposes of the Indenture the Exchangeable Shares of VES shall be treated as
Capital Stock of the Company, for which they are exchangeable, and shall not be
treated as Capital Stock of VES).
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million or any Commercial
bank organized under the laws of any other country that is a member of the
Organization for Economic Cooperation and Development and has total assets in
excess of $500 million; (iii) commercial paper with a maturity of 180 days or
less issued by a corporation that is not an Affiliate of the Company and is
organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by S&P or at least P-l by Moody's; (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any
commercial bank meeting the specifications of clause (ii) above; (v) overnight
bank deposits and bankers acceptances at any commercial bank meeting the
qualifications specified in clause (ii) above; (vi) demand and time deposits and
certificates of deposit with any commercial bank organized in the United States
not meeting the qualifications specified in clause
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(ii) above, provided that such deposits and certificates support bond, letter of
credit and other similar types of obligations incurred in the ordinary course of
business; and (vii) investments in money market or other mutual funds
substantially all of whose assets comprise securities of the types described in
clauses (i) through (v) above.
"Change of Control" means the occurrence of any event or series of events
by which: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of
the total Voting Stock of the Company, (b) the Company consolidates with or
merges into another Person or any Person consolidates with, or merges into, the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities or
other property, other than any such transaction where (i) the outstanding Voting
Stock of the Company is changed into or exchanged for Voting Stock of the
surviving or resulting Person that is Qualified Capital Stock and (ii) the
holders of the Voting Stock of the Company immediately prior to such transaction
own, directly or indirectly, not less than a majority of the Voting Stock of the
surviving or resulting Person immediately after such transaction; (c) the
Company, either individually or in conjunction with one or more Restricted
Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes
of, or the Restricted Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties and assets of
the Company and its Restricted Subsidiaries, taken as a whole (either in one
transaction or a series of related transactions), including Capital Stock of the
Restricted Subsidiaries, to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); (d) during any consecutive two-year period, individuals
who at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of two-thirds of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or (e) the liquidation or dissolution of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
on a pro forma basis of (a) the sum of Consolidated Net Income, Consolidated
Fixed Charges, Consolidated Income Tax Expense, and Consolidated Non-cash
Charges deducted in computing Consolidated Net Income, in each case, for such
period, of the Company and its Restricted Subsidiaries on a consolidated basis,
all determined in accordance with GAAP, to (b) the sum of such Consolidated
Fixed Charges for such period; provided, however, that (i) the Consolidated
Fixed Charge Coverage Ratio shall be calculated on a pro forma basis assuming
that (A) the Indebtedness to be incurred (and all other Indebtedness incurred
after the first day of such period of four full fiscal quarters referred to in
the covenant described in paragraph (a) under "-- Certain
Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" through
and including the date of determination), and (if applicable) the application of
the net proceeds therefrom (and from any other such Indebtedness), including to
refinance other Indebtedness, had been incurred on the first day of such four
quarter period and, in the case of Acquired Indebtedness, on the assumption that
the related transaction (whether by means of purchase, merger or otherwise) also
had occurred on such date with the appropriate adjustments with respect to such
acquisition being included in such pro forma calculation and (B) any acquisition
or disposition by the Company or any Restricted Subsidiary of any properties or
assets outside the ordinary course of business, or any repayment of any
principal amount of any Indebtedness of the Company or any Restricted Subsidiary
prior to the Stated Maturity thereof, in either case since the first day of such
period of four full fiscal quarters through and including the date of
determination, had been consummated on such first day of such four-quarter
period, (ii) in making such computation, the Consolidated Fixed Charges
attributa-
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ble to interest on any Indebtedness required to be computed on a pro forma basis
in accordance with the covenant described in paragraph (a) under "-- Certain
Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" and (A)
bearing a floating interest rate shall be computed as if the rate in effect on
the date of computation had been the applicable rate for the entire period and
(B) which was not outstanding during the period for which the computation is
being made but which bears, at the option of the Company, a fixed or floating
rate of interest, shall be computed by applying, at the option of the Company,
either the fixed or floating rate, (iii) in making such computation, the
Consolidated Fixed Charges attributable to interest on any Indebtedness under a
revolving credit facility required to be computed on a pro forma basis in
accordance with the covenant described in paragraph (a) under "-- Certain
Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period, provided that such average daily balance shall be reduced by
the amount of any repayment of Indebtedness under a revolving credit facility
during the applicable period, which repayment permanently reduced the
commitments or amounts available to be reborrowed under such facility, (iv)
notwithstanding clauses (ii) and (iii) of this proviso, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Rate Protection Obligations, shall be deemed to
have accrued at the rate per annum resulting after giving effect to the
operation of such agreements, and (v) if after the first day of the period
referred to in clause (a) of this definition the Company has permanently retired
any Indebtedness out of the Net Cash Proceeds of the issuance and sale of shares
of Qualified Capital Stock of the Company within 30 days of such issuance and
sale, Consolidated Fixed Charges shall be calculated on a pro forma basis as if
such Indebtedness had been retired on the first day of such period.
"Consolidated Fixed Charges" means, for any period, without duplication,
(i) the sum of (a) the interest expense of the Company and its Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (A) any amortization of debt discount,
(B) the net cost under Interest Rate Protection Obligations (including any
amortization of discounts), (C) the interest portion of any deferred payment
obligation constituting Indebtedness, (D) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (E) all accrued interest, in each case to the extent attributable
to such period, (b) to the extent any Indebtedness of any Person (other than the
Company or a Restricted Subsidiary) is guaranteed by the Company or any
Restricted Subsidiary, the aggregate amount of interest paid (to the extent not
accrued in a prior period) or accrued by such other Person during such period
attributable to any such Indebtedness, in each case to the extent attributable
to that period, (c) the aggregate amount of the interest component of
Capitalized Lease Obligations paid (to the extent not accrued in a prior
period), accrued or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period, (d) the aggregate amount of
dividends paid (to the extent not accrued in a prior period) or accrued on
Preferred Stock or Disqualified Capital Stock of the Company and its Restricted
Subsidiaries, to the extent such Preferred Stock or Disqualified Capital Stock
is owned by Persons other than the Company or any Restricted Subsidiary and (e)
one-third of the rental expense (including without limitation marine vessel
charter payments) under operating leases with remaining noncancellable terms of
at least one year (excluding leases in respect of office space) of the Company
and its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, less (ii), to the extent included in clause (i)
above, amortization of capitalized debt issuance costs of the Company and its
Restricted Subsidiaries during such period.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes (including state franchise taxes
accounted for as income taxes in accordance with GAAP) of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding (a) net after-tax
extraordinary gains or losses (less all fees and expenses relating
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<PAGE> 52
thereto), (b) net after-tax gains or losses (less all fees and expenses relating
thereto) attributable to Asset Sales, (c) the net income (or net loss) of any
Person (other than the Company or any of its Restricted Subsidiaries), in which
the Company or any of its Restricted Subsidiaries has an ownership interest,
except to the extent of the amount of dividends or other distributions actually
paid to the Company or any of its Restricted Subsidiaries in cash by such other
Person during such period (regardless of whether such cash dividends or
distributions are attributable to net income (or net loss) of such Person during
such period or during any prior period), (d) net income (or net loss) of any
Person (other than VES) combined with the Company or any of its Restricted
Subsidiaries on a "pooling of interests" basis attributable to any period prior
to the date of combination, (e) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of its net income is not at the date of
determination permitted, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (f) income resulting from transfers of assets received by the
Company or any Restricted Subsidiary from an Unrestricted Subsidiary, and (g)
for the fiscal year ended July 31, 1996, merger related costs reflected in the
Company's consolidated financial statements.
"Consolidated Net Tangible Assets" means, at any date, the aggregate amount
of assets included on the most recent consolidated balance sheet of the Company
and its Restricted Subsidiaries, less (i) without duplication, applicable
reserves and other properly deductible items and after deducting therefrom all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, and (ii) current liabilities (other than
current liabilities constituting Indebtedness for borrowed money), as determined
in accordance with GAAP.
"Consolidated Net Worth" means, at any date, the consolidated stockholders'
equity of the Company less (without duplication) the amount of such
stockholders' equity attributable to Disqualified Capital Stock or treasury
stock of the Company and its Restricted Subsidiaries, as determined in
accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization and other non-cash expenses (excluding
non-cash expenses related to multi-client seismic data sales and write-offs and
write-downs related to the Company's multi-client seismic data library) of the
Company and its Restricted Subsidiaries reducing Consolidated Net Income for
such period, determined on a consolidated basis in accordance with GAAP
(excluding any such non-cash charge for which an accrual of or reserve for cash
charges for any future period is required).
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time which were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or futures contract or other similar agreement or arrangement designed to
protect against or manage such Person's or any of its Subsidiaries' exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event, act or condition that is, or after notice or
passage of time or both would become, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the Indenture,
a member of the Board of Directors of the Company who does not have any material
direct or indirect financial interest (other than an interest arising solely
from the beneficial ownership of Capital Stock of the Company) in or with
respect to such transaction or series of transactions.
"Disqualified Capital Stock" means any Capital Stock that, either by its
terms, by the terms of any security into which it is convertible or exchangeable
or by contract or otherwise, is, or upon the happening of an event or passage of
time would be, required to be redeemed or repurchased, in whole or in part,
prior to the final Stated Maturity of the Senior Notes or is redeemable at the
option of the
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holder thereof at any time prior to such final Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
final Stated Maturity. For purposes of the covenant described in paragraph (a)
under "-- Certain Covenants -- Limitation on Indebtedness and Disqualified
Capital Stock," Disqualified Capital Stock shall be valued at the greater of its
voluntary or involuntary maximum fixed redemption or repurchase price plus
accrued and unpaid dividends. For such purposes, the "maximum fixed redemption
or repurchase price" of any Disqualified Capital Stock which does not have a
fixed redemption or repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were redeemed or repurchased on the date of determination, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Disqualified Capital Stock; provided, however,
that if such Disqualified Capital Stock is not at the date of determination
permitted or required to be redeemed or repurchased, the "maximum fixed
redemption or repurchase price" shall be the book value of such Disqualified
Capital Stock.
"Event of Default" has the meaning set forth above under the caption
"Events of Default."
"Foreign Restricted Subsidiaries" means Digicon (Nigeria) Limited, Digicon
(Malaysia) Sdn. Bhd., Digital Exploration (Nigeria) Limited and P. T. Digicon
Mega Pratama.
"GAAP" means generally accepted accounting principles, consistently
applied, that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which are
applicable as of the date of the Indenture.
The term "guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down under letters of credit. When used as a verb,
"guarantee" has a corresponding meaning.
"Holder" means a Person in whose name a Senior Note is registered in the
Note Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person, contingent or otherwise, for borrowed money or
for the deferred purchase price of property or services (excluding any trade
accounts payable and other accrued current liabilities incurred in the ordinary
course of business) and all liabilities of such Person incurred in connection
with any letters of credit, bankers' acceptances or other similar credit
transactions or any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any Capital Stock of such Person, or any warrants,
rights or options to acquire such Capital Stock, outstanding on the date of the
Indenture or thereafter, if, and to the extent, any of the foregoing would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, (b) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (c) all Indebtedness of such Person created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (d) the Attributable Indebtedness
respecting all Capitalized Lease Obligations of such Person, (e) all
Indebtedness referred to in the preceding clauses of other Persons and all
dividends of other Persons, the payment of which is secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon property (including, without limitation,
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accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness (the amount of
such obligation being deemed to be the lesser of the value of such property or
the amount of the obligation so secured), (f) all guarantees by such Person of
Indebtedness referred to in this definition, (g) all obligations of such Person
under or in respect of Currency Hedge Obligations and Interest Rate Protection
Obligations and (h) deferred credits respecting discontinued services.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against or manage such Person's or any of its Subsidiaries exposure to
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities (including derivatives) or
evidences of Indebtedness issued by, any other Person. In addition, the fair
market value of the net assets of any Restricted Subsidiary at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be
deemed to be an "Investment" made by the Company in such Unrestricted Subsidiary
at such time. "Investments" shall exclude (a) extensions of trade credit or
other advances to customers on commercially reasonable terms in accordance with
normal trade practices or otherwise in the ordinary course of business, (b)
Interest Rate Protection Obligations and Currency Hedge Obligations, but only to
the extent that the same constitute Permitted Indebtedness and (c) endorsements
of negotiable instruments and documents in the ordinary course of business.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim or similar type
of encumbrance (including, without limitation, any agreement to give or grant
any lease, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing) upon or with
respect to any property of any kind. A Person shall be deemed to own subject to
a Lien any property which such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Maturity" means, with respect to any Senior Note, the date on which any
principal of such Senior Note becomes due and payable as therein or in the
Indenture provided, whether at the Stated Maturity with respect to such
principal or by declaration of acceleration, call for redemption or purchase or
otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel, accountants and investment banks) related to such Asset Sale,
(ii) provisions for all taxes payable as a result of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the properties or assets
subject to the Asset Sale or having a Lien thereon and (iv) appropriate amounts
to be provided by the Company or any Restricted Subsidiary, as the case may be,
as a reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale and retained by the Company or any Restricted Subsidiary,
as
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the case may be, after such Asset Sale, including, without limitation, pension
and other postemployment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee; provided, however, that any amounts remaining after
adjustments, revaluations or liquidations of such reserves shall constitute Net
Available Proceeds.
"Net Cash Proceeds," with respect to any issuance or sale of Qualified
Capital Stock or other securities, means the cash proceeds of such issuance or
sale net of attorneys' fees, accountants' fees, underwriters' or placement
agents' fees, discounts or commissions and brokerage, consultant and other fees
and expenses actually incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Restricted Subsidiary incurred in connection
with the acquisition by the Company or such Restricted Subsidiary of any
property or assets and as to which (a) the holders of such Indebtedness agree
that they will look solely to the property or assets so acquired and securing
such Indebtedness for payment on or in respect of such Indebtedness, and neither
the Company nor any Subsidiary (other than an Unrestricted Subsidiary) (i)
provides credit support, including any undertaking, agreement or instrument
which would constitute Indebtedness or (ii) is directly or indirectly liable for
such Indebtedness, and (b) no default with respect to such Indebtedness would
permit (after notice or passage of time or both), according to the terms
thereof, any holder of any Indebtedness of the Company or a Restricted
Subsidiary to declare a default on such Indebtedness or cause the payment
thereof to be accelerated or payable prior to its Stated Maturity.
"Note Register" means the register maintained by or for the Company in
which the Company shall provide for the registration of the Senior Notes and the
transfer of the Senior Notes.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness (and any guarantee thereof) under one or more working
capital credit facilities with banks and other financial institutions in an
aggregate principal amount at any one time outstanding not to exceed $20
million, less any amounts derived from Asset Sales and applied to the
permanent reduction of the Indebtedness under any such credit facilities as
contemplated by the "Limitation on Asset Sales" covenant (the "Maximum Bank
Credit Amount"), and any renewals, amendments, extensions, supplements,
modifications, deferrals, refinancings or replacements (each, for purposes
of this clause (i), a "refinancing") thereof, including any successive
refinancing thereof, so long as the aggregate principal amount of any such
new Indebtedness, together with the aggregate principal amount of all other
Indebtedness outstanding pursuant to this clause (i), shall not at any one
time exceed the Maximum Bank Credit Amount;
(ii) Indebtedness under the Senior Notes;
(iii) Indebtedness outstanding or in effect on the date of the
Indenture (and not repaid or defeased with the proceeds of the offering of
the Senior Notes);
(iv) Indebtedness under Interest Rate Protection Obligations, provided
that (1) such Interest Rate Protection Obligations are related to payment
obligations on Permitted Indebtedness or Indebtedness otherwise permitted
by paragraph (a) of the "Limitation on Indebtedness and Disqualified
Capital Stock" covenant, and (2) the notional principal amount of such
Interest Rate Protection Obligations does not exceed the principal amount
of such Indebtedness to which such Interest Rate Protection Obligations
relate;
(v) Indebtedness under Currency Hedge Obligations, provided that (1)
such Currency Hedge Obligations are related to payment obligations on
Permitted Indebtedness or Indebtedness otherwise permitted by paragraph (a)
of the "Limitation on Indebtedness and Disqualified Capital Stock" covenant
or to the foreign currency cash flows reasonably expected to be generated
by the Company and its Restricted Subsidiaries, and (2) the notional
principal amount of such Currency
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Hedge Obligations does not exceed the principal amount of such Indebtedness
and the amount of such foreign currency cash flows to which such Currency
Hedge Obligations relate;
(vi) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary to the Company or
a Wholly Owned Restricted Subsidiary; provided, however, that upon any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Wholly Owned Restricted Subsidiary ceasing to be
a Wholly Owned Restricted Subsidiary or any other subsequent transfer of
any such Indebtedness (except to the Company or a Wholly Owned Restricted
Subsidiary), such Indebtedness shall be deemed, in each case, to be
incurred and shall be treated as an incurrence for purposes of paragraph
(a) of the "Limitation on Indebtedness and Disqualified Capital Stock"
covenant at the time the Wholly Owned Restricted Subsidiary in question
ceased to be a Wholly Owned Restricted Subsidiary or the time such
subsequent transfer occurred;
(vii) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company in the ordinary course of business,
including guaranties or obligations of the Company with respect to letters
of credit supporting such bid, performance or surety obligations (in each
case other than for an obligation for money borrowed);
(viii) Non-Recourse Indebtedness;
(ix) any renewals, substitutions, refinancing or replacements (each,
for purposes of this clause (ix), a "refinancing") by the Company or a
Restricted Subsidiary of any Indebtedness, including any successive
refinances by the Company or such Restricted Subsidiary, so long as (A) any
such new Indebtedness shall be in a principal amount that does not exceed
the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Indebtedness refinanced or the amount of any premium
reasonably determined by the Company or such Restricted Subsidiary as
necessary to accomplish such refinancing, plus the amount of expenses of
the Company or such Restricted Subsidiary incurred in connection with such
refinancing, (B) in the case of any refinancing of Indebtedness (including
the Senior Notes) that is pari passu with or subordinated in right of
payment to the Senior Notes, then such new Indebtedness is pari passu with
or subordinated in right of payment to the Senior Notes at least to the
same extent as the Indebtedness being refinanced and (C) such new
Indebtedness has an Average Life equal to or longer than the Average Life
of the Indebtedness being refinanced and a final Stated Maturity that is at
least 91 days later than the final Stated Maturity of the Indebtedness
being refinanced; and
(x) any additional Indebtedness in an aggregate principal amount not
in excess of $5 million at any one time outstanding and any guarantee
thereof.
"Permitted Investments" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Wholly Owned
Restricted Subsidiaries; (iii) Investments by the Company or any of its
Restricted Subsidiaries in another Person, if as a result of such Investment (A)
such other Person becomes a Wholly Owned Restricted Subsidiary or (B) such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all of its properties and assets to, the Company or a Wholly Owned
Restricted Subsidiary; (iv) Investments permitted under the "Limitation on Asset
Sales" covenant; (v) Investments made in the ordinary course of business in
prepaid expenses, lease, utility, workers' compensation, performance and other
similar deposits; (vi) Investments in stock, obligations or securities received
in settlement of debts owing to the Company or any Restricted Subsidiary as a
result of bankruptcy or insolvency proceedings or upon the foreclosure,
perfection or enforcement of any Lien in favor of the Company or any Restricted
Subsidiary, in each case as to debt owing to the Company or any Restricted
Subsidiary that arose in the ordinary course of business of the Company or any
such Restricted Subsidiary, provided that any
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stocks, obligations or securities received in settlement of debts that arose in
the ordinary course of business (and received other than as a result of
bankruptcy or insolvency proceedings or upon foreclosure, perfection or
enforcement of any Lien) that are, within 30 days of receipt, converted into
cash or Cash Equivalents shall be treated as having been cash or Cash
Equivalents at the time received; and (vii) Investments in joint ventures,
partnerships or Affiliates in an aggregate amount not to exceed at any one time
$7.5 million.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the Indenture;
(b) Liens securing the Senior Notes;
(c) Liens in favor of the Company;
(d) Liens on accounts receivable, notes receivable, chattel paper or
inventory securing Indebtedness under one or more working capital
facilities with banks or other financial institutions that does not, in the
aggregate, exceed the greater of (x) 10% of the Company's Consolidated Net
Tangible Assets or (y) the amounts permitted pursuant to clause (i) of the
definition of Permitted Indebtedness;
(e) Liens securing Indebtedness that constitutes Permitted
Indebtedness pursuant to clause (ix) of the definition of "Permitted
Indebtedness" incurred as a refinancing of any Indebtedness secured by
Liens described in clause (a) or (d) of this definition;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(g) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(h) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) any interest or title of a lessor under any Capitalized Lease
Obligation (to the extent the Attributable Indebtedness related thereto
constitutes Indebtedness permitted to be incurred under the terms of the
Indenture) or operating lease;
(j) purchase money Liens; provided, however, that (i) the related
purchase money Indebtedness shall not be secured by any property or assets
of the Company or any Restricted Subsidiary other than the property or
assets so acquired and any proceeds therefrom and (ii) the Lien securing
such Indebtedness shall be created within 90 days of such acquisition;
(k) Liens securing obligations under or in respect of either Currency
Hedge Obligations or Interest Rate Protection Obligations;
(l) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers acceptances
issued or created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
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(m) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property or
assets relating to such letters of credit and products and proceeds
thereof;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
setoff; and
(o) Liens securing Non-Recourse Indebtedness; provided, however, that
the related Non-Recourse Indebtedness shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets acquired by the Company or any Restricted Subsidiary
with the proceeds of such Non-Recourse Indebtedness.
"Permitted Subsidiary Indebtedness" means, with respect to Restricted
Subsidiaries, Indebtedness in an aggregate principal amount at any time
outstanding up to the excess, if any, of (A) 10% of the Company's Consolidated
Net Tangible Assets over (B) the greater of $20.0 million or the aggregate
principal amount of outstanding secured Indebtedness of the Company incurred in
compliance with clause (a) of the "-- Limitation on Indebtedness and
Disqualified Capital Stock" covenant.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Public Equity Offering" means an offer and sale of Common Stock of the
Company pursuant to a registration statement that has been declared effective by
the Commission pursuant to the Securities Act (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Restricted Investment" means (without duplication) (i) the designation of
a Subsidiary as an Unrestricted Subsidiary in the manner described in the
definition of "Unrestricted Subsidiary" and (ii) any Investment other than a
Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Sale/Leaseback Transaction" means any direct or indirect arrangement
pursuant to which properties or assets are sold or transferred by the Company or
a Restricted Subsidiary and are thereafter leased back from the purchaser or
transferee thereof by the Company or one of its Restricted Subsidiaries.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the date specified in the instrument evidencing
or governing such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of interest is due and payable.
"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to the Senior Notes.
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"Subsidiary" means, with respect to any Person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such Person, by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, have at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions).
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company as an Unrestricted Subsidiary so long as (a)
neither the Company nor any Restricted Subsidiary is directly or indirectly
liable pursuant to the terms of any Indebtedness of such Subsidiary; (b) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse of time or otherwise) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity; (c) such designation as an Unrestricted Subsidiary would be
permitted under the "Limitation on Restricted Payments" covenant; and (d) such
designation shall not result in the creation or imposition of any Lien on any of
the properties or assets of the Company or any Restricted Subsidiary (other than
any Permitted Lien or any Lien the creation or imposition of which shall have
been in compliance with the "Limitation on Liens" covenant); provided, however,
that with respect to clause (a), the Company or a Restricted Subsidiary may be
liable for Indebtedness of an Unrestricted Subsidiary if (x) such liability
constituted a Permitted Investment or a Restricted Payment permitted by the
"Limitation on Restricted Payments" covenant, in each case at the time of
incurrence, or (y) the liability would be a Permitted Investment at the time of
designation of such Subsidiary as an Unrestricted Subsidiary. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing a Board Resolution with the Trustee giving effect to such
designation. The Board of Directors of the Company may designate any
Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving
effect to such designation on a pro forma basis, (i) no Default or Event of
Default shall have occurred and be continuing, (ii) the Company could incur
$1.00 of additional Indebtedness (not including the incurrence of Permitted
Indebtedness) under the first paragraph of the "Limitation on Indebtedness and
Disqualified Capital Stock" covenant and (iii) if any of the properties and
assets of the Company or any of its Restricted Subsidiaries would upon such
designation become subject to any Lien (other than a Permitted Lien), the
creation or imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means (a) any Restricted Subsidiary to
the extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable laws and regulations of such foreign jurisdiction to be partially
owned by the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction, provided that the Company,
directly or indirectly, owns the remaining Capital Stock or ownership interest
in such Restricted Subsidiary and, by contract or otherwise, controls the
management and business of such Restricted Subsidiary and derives the economic
benefits of ownership of such Restricted Subsidiary to substantially the same
extent as if such Restricted Subsidiary were a wholly owned Subsidiary, and (b)
any
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Foreign Restricted Subsidiary so long as the direct or indirect ownership
interest of the Company therein is no less than at the date of the Indenture.
BOOK ENTRY; DELIVERY AND FORM
The Senior Notes will be issued in the form of a single, permanent global
certificate in definitive, fully registered form (the "Global Note"). The Global
Note will be deposited with, or on behalf of, DTC and registered in the name of
the nominee of DTC.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee.
DTC has advised the Company and the Underwriters as follows: It is a
limited-purpose trust company which was created to hold securities for its
participating organizations (the "Participants") and to facilitate the clearance
and settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. Participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations and certain other organizations. Access
to the DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("indirect
participants"). Persons who are not Participants may beneficially own securities
held by DTC only through Participants or indirect participants.
DTC has also advised that pursuant to procedures established by it (i) upon
the issuance by the Company of the Senior Notes, DTC will credit the accounts of
Participants designated by the Underwriters with the principal amount of the
Senior Notes purchased by the Underwriters, and (ii) ownership of beneficial
interests in the Global Note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC (with respect
to Participants' interests), the Participants and the indirect participants. The
laws of some states require that certain persons take physical delivery in
definitive form of securities which they own. Consequently, the ability to
transfer beneficial interests in the Global Note is limited to such extent.
So long as a nominee of DTC is the registered owner of the Global Note,
such nominee will be considered the sole owner or holder of the Senior Notes for
all purposes under the Indenture. Except as provided below, owners of beneficial
interests in the Global Note will not be entitled to have Senior Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Senior Notes in definitive form and will not be considered the
owners or holders thereof under the Indenture.
Neither the Company, the Trustee, the paying agent nor the Senior Notes
registrar will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Note, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Principal and interest payments on the Global Note registered in the name
of DTC's nominee of DTC will be made by the Company, either directly or through
a paying agent, to DTC's nominee as the registered owner of the Global Note.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Senior Notes are registered as the owners of such
Senior Notes for the purpose of receiving payments of principal and interest on
such Senior Notes and for all other purposes whatsoever. Therefore, neither the
Company, the Trustee nor any paying agent has any direct responsibility or
liability for the payment of principal or interest on the Senior Notes to owners
of beneficial interests in the Global Note. DTC has advised the Company and the
Trustee that its present practice is, upon receipt of any payment of principal
or interest to credit immediately the accounts of the Participants with payment
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the Global Note as shown on the records of DTC. Payments
by Participants and indirect participants to owners of beneficial interests in
the Global Note will be governed by standing instructions and customary
practices, as is now the case with securities held for
60
<PAGE> 61
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such Participants or indirect participants.
As long as the Senior Notes are represented by a Global Note, DTC's nominee
will be the holder of the Senior Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Senior Notes. See
"-- Certain Covenants -- Change of Control" and "-- Limitation on Asset Sales."
Notice by Participants or indirect participants or by owners of beneficial
interests in a Global Note held through such Participants or indirect
participants of the exercise of the option to elect repayment of beneficial
interests in Senior Notes represented by a Global Note must be transmitted to
DTC in accordance with its procedures on a form required by DTC and provided to
Participants. In order to ensure that DTC's nominee will timely exercise a right
to repayment with respect to a particular Senior Note, the beneficial owner of
such Senior Note must instruct the broker or other Participant or exercise a
right to repayment. Different firms have cut-off times for accepting
instructions from their customers and, accordingly, each beneficial owner should
consult the broker or other Participant or indirect participant through which it
holds an interest in a Senior Note in order to ascertain the cut-off time by
which such an instruction must be given in order for timely notice to be
delivered to DTC. The Company will not be liable for any delay in delivery of
notices of the exercise of the option to elect repayment.
The Company will issue Senior Notes in definitive form in exchange for the
Global Note if, and only if, DTC is at any time unwilling or unable to continue
as depository and a successor depository is not appointed by the Company within
90 days. In such an instance, an owner of a beneficial interest in the Global
Note will be entitled to have Senior Notes equal in principal amount to such
beneficial interest registered in its name and will be entitled to physical
delivery of such Senior Notes in definitive form. Senior Notes so issued in
definitive form will be issued in denominations of $1,000 and integral multiples
thereof and will be issued in registered form only, without coupons.
61
<PAGE> 62
UNDERWRITING
Subject to terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to Dillon, Read & Co.
Inc. ("Dillon Read"), Salomon Brothers Inc, Rauscher Pierce Refsnes, Inc. and
Raymond James & Associates, Inc. (together with Dillon Read, the "Underwriters")
and the Underwriters have severally agreed to purchase the respective principal
amounts of the Senior Notes set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- -----------
<S> <C>
Dillon, Read & Co. Inc. .......................................
Salomon Brothers Inc...........................................
Rauscher Pierce Refsnes, Inc. .................................
Raymond James & Associates, Inc. ..............................
-----------
Total................................................ $75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the Senior Notes if any are purchased.
The Underwriters propose to offer the Senior Notes directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a commission not in excess
of % of the principal amount. The Underwriters may allow, and such dealers
may reallow, a commission not in excess of % of the principal amount on
sales to certain other dealers. The offering of the Senior Notes is made for
delivery when, as and if accepted by the Underwriters and subject to prior sale
and to withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any offer for the purchase of the
Senior Notes. After the initial public offering, the public offering price and
other selling terms may be changed by the Underwriters.
The Company has agreed in the Underwriting Agreement to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Senior Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Senior Notes
on any national securities exchange or to seek the admission thereof to trading
in the Nasdaq National Market System. The Company has been advised by the
Underwriters that the Underwriters presently intend to make a market in the
Senior Notes following completion of the Offering. However, the Underwriters are
not obligated to do so and any market-making activities with respect to the
Senior Notes may be discontinued at any time without notice. Accordingly, no
assurance can be given that an active market will develop for the Senior Notes
or as to the liquidity of or the trading market for the Senior Notes. If a
trading market does not develop or is not maintained, holders of the Senior
Notes may experience difficulty in reselling the Senior Notes or may be unable
to sell them at all. If a market for the Senior Notes develops, any such market
may be discontinued at any time. If a public trading market develops for the
Senior Notes, future trading prices of the Senior Notes (which could be at a
discount to the principal amount thereof) will depend on many factors,
including, among other things, prevailing interest rates, the Company's results
of operations and financial condition and the market for similar securities.
The Underwriters and their respective affiliates may engage in transactions
with and perform services for the Company or one or more of its affiliates in
the ordinary course of business. Rauscher Pierce Refsnes, Inc. ("Rauscher
Pierce") provided services to VES in connection with the Combination and
received $350,000 for such services. These services were in the ordinary course
of Rauscher Pierce's business.
62
<PAGE> 63
LEGAL MATTERS
Certain legal matters in connection with the validity of the Senior Notes
offered hereby will be passed on for the Company by Porter & Hedges, L.L.P.,
Houston, Texas. Certain legal matters in connection with such securities are
being passed upon for the Underwriters by Vinson & Elkins L.L.P., Houston,
Texas.
EXPERTS
The supplemental consolidated financial statements of Veritas DGC Inc. as
of July 31, 1995 and 1996 and for each of the three years in the period ended
July 31, 1996 included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report which has been
included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Digicon Inc. incorporated in this
Prospectus by reference from Digicon Inc.'s Annual Report on Form 10-K, for the
year ended July 31, 1996 has been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of Veritas Energy Services Inc. as of
October 31, 1994 and 1995, and for each of the three years ended October 31,
1993, 1994 and 1995, incorporated in this Prospectus by reference to the
Definitive Joint Management Information Circular and Proxy Statement of Digicon
Inc. and Veritas Energy Services Inc. dated July 19, 1996, have been so included
in reliance on the report of Price Waterhouse, Chartered Accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Veritas Energy Services Inc., as
of and for the nine months ended July 31, 1996, not separately presented in this
Prospectus, have been audited by Price Waterhouse, Chartered Accountants, whose
report thereon appears herein. Such consolidated financial statements, to the
extent they have been included in the supplemental consolidated financial
statements of Veritas DGC Inc., have been so included in reliance on their
report given on the authority of said firm as experts in auditing and
accounting.
63
<PAGE> 64
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP................................ F-2
Independent Accountants' Report of Price Waterhouse.................................. F-3
Supplemental Consolidated Statements of Operations for the years ended July 31, 1994,
1995, 1996......................................................................... F-4
Supplemental Consolidated Balance Sheets as of July 31, 1995 and 1996................ F-5
Supplemental Consolidated Statements of Cash Flows for the years ended July 31, 1994,
1995, 1996......................................................................... F-6
Supplemental Consolidated Statements of Changes in Stockholders' Equity for the years
ended July 31, 1994, 1995 and 1996................................................. F-8
Notes to Supplemental Consolidated Financial Statements.............................. F-10
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Veritas DGC Inc.
Houston, Texas
We have audited the supplemental consolidated balance sheets of Veritas DGC
Inc. and subsidiaries as of July 31, 1995 and 1996, and the related supplemental
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the three years in the period ended July 31, 1996. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
supplemental consolidated financial statements based on our audits. The
supplemental consolidated financial statements give retroactive effect to the
merger of Digicon Inc. and Veritas Energy Services Inc., which has been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. We did not audit the
consolidated balance sheets of Veritas Energy Services Inc. as of October 31,
1995 or as of July 31, 1996, or the related consolidated statements of
operations, cash flows and changes in stockholders' equity of Veritas Energy
Services Inc. for each of the two years in the period ended October 31, 1995 or
for the twelve months ended July 31, 1996, which statements reflect total assets
of $53,910,000 and $57,793,000 as of October 31, 1995 and July 31, 1996,
respectively, and total revenues of $90,070,000 and $109,996,000 for the years
ended October 31, 1994 and 1995, respectively and $118,591,000 for the twelve
months ended July 31, 1996. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Veritas Energy Services Inc. for 1994, 1995 and 1996,
is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Veritas DGC Inc. and
subsidiaries as of July 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended July 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston Texas
October 10, 1996
F-2
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Veritas Energy Services Inc.
We have audited the consolidated balance sheets of Veritas Energy Services Inc.
as at July 31, 1996 and October 31, 1995 and the consolidated statements of
operations, retained earnings and changes in financial position for the nine
months ended July 31, 1996 and for the years ended October 31, 1995 and 1994
(not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at July 31, 1996 and
October 31, 1995 and the results of its operations and the changes in its
financial position for the nine months ended July 31, 1996 and for the years
ended October 31, 1995 and 1994 in accordance with Canadian generally accepted
accounting principles.
PRICE WATERHOUSE
Chartered Accountants
Calgary, Alberta
September 20, 1996
F-3
<PAGE> 67
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(AS COMBINED -- SEE NOTE 2)
REVENUES................................................... $ 178,392 $ 215,630 $ 250,596
COSTS AND EXPENSES:
Operating expenses:
Cost of services...................................... 144,984 170,424 198,711
Restructuring......................................... 838
Write-off/write-down for impairment of assets............ 5,235 3,628
Depreciation and amortization............................ 19,119 23,732 26,921
Selling, general and administrative...................... 6,296 5,855 7,255
Other (income) expense:
Merger related costs.................................. 3,666
Interest.............................................. 3,213 5,170 5,466
Gain on sale of investment in FSU joint ventures...... (4,370)
Other................................................. (1,833) 232 546
-------- -------- --------
Total............................................ 177,852 201,043 246,193
-------- -------- --------
Income before provision for income taxes and equity in loss
of 50% or less-owned companies and joint ventures........ 540 14,587 4,403
Provision for income taxes................................. 5,929 3,807 2,009
Equity in loss of 50% or less-owned companies and joint
ventures................................................. 4,965 5,186 1,113
-------- -------- --------
NET INCOME (LOSS).......................................... $ (10,354) $ 5,594 $ 1,281
======== ======== ========
PER SHARE OF COMMON STOCK:
Earnings (loss) per share................................ $ (.66) $ .31 $ .07
======== ======== ========
Weighted average shares.................................. 15,633 17,771 17,882
======== ======== ========
Cash dividends -- common stock........................... None None None
======== ======== ========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-4
<PAGE> 68
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PAR VALUE AND NUMBER OF SHARES)
<TABLE>
<CAPTION>
JULY 31,
------------------------
1995 1996
--------- ---------
(AS COMBINED -- SEE NOTE 2)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................ $ 10,082 $ 10,072
Restricted cash investments................................................. 670 327
Accounts and notes receivable (net of allowance for doubtful accounts: 1995,
$607; 1996, $740)......................................................... 54,587 65,447
Materials and supplies inventory (net of reserve for obsolescence: 1995,
$66; 1996, $0)............................................................ 1,418 1,659
Prepayments and other....................................................... 5,805 8,199
-------- --------
Total current assets................................................. 72,562 85,704
Property and equipment:
Seismic equipment........................................................... 92,538 103,899
Data processing equipment................................................... 32,506 34,403
Leasehold improvements and other............................................ 32,085 26,802
-------- --------
Total................................................................ 157,129 165,104
Less accumulated depreciation............................................. 81,750 86,094
-------- --------
Property and equipment -- net........................................ 75,379 79,010
Multi-client data library..................................................... 27,976 25,628
Investment in and advances to joint ventures.................................. 187 1,463
Goodwill (net of accumulated amortization: 1995, $1,701; 1996, $2,214)........ 4,223 3,674
Other assets.................................................................. 4,013 3,113
-------- --------
Total................................................................ $ 184,340 $ 198,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................ $ 10,895 $ 13,739
Accounts payable -- trade................................................... 23,526 27,454
Accrued interest............................................................ 408 313
Other accrued liabilities................................................... 19,213 19,905
Income taxes payable........................................................ 3,690 1,814
-------- --------
Total current liabilities............................................ 57,732 63,225
Non-current liabilities:
Long-term debt -- less current maturities................................... 25,893 27,351
Deferred credits............................................................ 1,084 364
Other non-current liabilities............................................... 1,631 1,729
-------- --------
Total non-current liabilities........................................ 28,608 29,444
Commitments and contingent liabilities (Note 10)
Stockholders' equity:
Common stock, $.01 par value; authorized: 20,000,000 shares; issued:
11,134,939 shares and 11,334,352 shares at July 31, 1995 and 1996,
respectively (See Note 12)................................................ 111 113
Additional paid-in capital.................................................. 100,797 104,469
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.)..... 1,930 2,275
Less: Treasury stock, at cost; 858,497 shares in 1995....................... (4,772)
Cumulative foreign currency translation adjustment.......................... (66) (934)
-------- --------
Total stockholders' equity........................................... 98,000 105,923
-------- --------
Total................................................................ $ 184,340 $ 198,592
======== ========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-5
<PAGE> 69
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
---------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(AS COMBINED -- SEE NOTE 2)
OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (10,354) $ 5,594 $ 1,281
Non-cash items included in net income (loss):
Restructuring accrual................................................... 252 14
Write-off/write-down for impairment of assets........................... 5,235 3,628
Depreciation and amortization........................................... 19,119 23,732 26,921
Amortization of warrants issued with short-term related party loans..... 89
Amortization of deferred gain on sale/leaseback......................... (898) (103)
(Gain) loss on disposition of property and equipment.................... (1,592) 919 875
Equity in loss of 50% or less-owned companies and joint ventures........ 4,965 5,186 1,113
Gain on sale of investment in FSU joint ventures........................ (4,370)
Write-down of multi-client data library to market....................... 778 1,786 1,774
Other................................................................... (842) (339) 61
Change in operating assets/liabilities (exclusive of the effects of the
purchase of Data Graphics Ltd. in 1995):
Accounts and notes receivable........................................... (1,626) (8,230) (9,466)
Materials and supplies inventory........................................ 910 235 (241)
Prepayments and other................................................... 1,435 (3,044) (1,807)
Multi-client data library............................................... (10,075) (11,262) 574
Other................................................................... (2,027) 731 851
Accounts payable -- trade............................................... (6,103) (4,988) 952
Accrued interest........................................................ 131 117 (96)
Other accrued liabilities............................................... 4,584 7,837 796
Income taxes payable.................................................... 1,116 1,721 (227)
Deferred credits........................................................ (455) (239) (720)
Other non-current liabilities........................................... 1,679 (376) (821)
Adjustment to conform fiscal year of Veritas Energy Services Inc.......... (5,268)
-------- -------- --------
Total cash provided by operating activities........................ 7,130 14,215 20,077
FINANCING ACTIVITIES:
Payments of long-term debt................................................ (9,777) (9,634) (11,437)
Borrowings from long-term debt............................................ 531 1,500
Net borrowings (payments) under credit agreements......................... 7,446 1,676 (2,665)
Net proceeds from sale of common stock.................................... 28,219 (44) 4,470
Net proceeds from sale of treasury stock.................................. 3,984 3,972
Borrowings of short-term related party loans.............................. 6,081 30
Payments of short-term related party loans................................ (4,801) (2,725)
-------- -------- --------
Total cash provided (used) by financing activities................. 27,168 (6,182) (4,160)
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash investments........................ 304 (350) 343
Increase in investment in and advances to joint ventures.................. (1,185) (4,231) (2,372)
Sale to Syntron, Inc.:
Inventories and technologies............................................ 1,630
Property and equipment.................................................. 1,370
Sale of investment in FSU joint ventures.................................. 6,000
Purchase of property and equipment........................................ (24,487) (19,231) (14,459)
Sale of property and equipment............................................ 1,402 1,651 668
Purchase of Data Graphics Ltd............................................. (407)
-------- -------- --------
Total cash used by investing activities............................ (23,966) (13,568) (15,820)
Currency (gain) loss on foreign cash........................................ (108) 72 (107)
-------- -------- --------
Change in cash and cash equivalents......................................... 10,224 (5,463) (10)
Beginning cash and cash equivalents balance................................. 5,321 15,545 10,082
-------- -------- --------
Ending cash and cash equivalents balance.................................... $ 15,545 $ 10,082 $ 10,072
======== ======== ========
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-6
<PAGE> 70
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO SUPPLEMENTAL CONSOLIDATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JULY 31,
--------------------------------
1994 1995 1996
------ ------- -------
(AS COMBINED -- SEE NOTE 2)
<S> <C> <C> <C>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in assets/liabilities due to purchase of Data Graphics Ltd.:
Accounts receivable.................................................................. $ 354
Property and equipment -- net........................................................ 213
Goodwill............................................................................. 748
Accounts payable -- trade............................................................ 637
Long-term debt....................................................................... 678
Increase (decrease) in investment in FSU joint ventures for:
Common stock......................................................................... $7,299 2,309
Accounts and note receivable from FSU joint ventures................................. 135 (409)
Increase in property and equipment for:
Accounts and notes receivable -- deferred credits utilized........................... 2,045 $ 866
Execution of equipment purchase obligations.......................................... 4,227 12,024 16,963
Accounts payable -- trade............................................................ 1,058 334 572
Increase in prepayments on property and equipment for notes payable.................... 601
Increase in notes receivable for:
Sale of property and equipment....................................................... 250
Sale of other assets................................................................. 1,330
Sale of investment in FSU joint ventures resulting in an increase (decrease) in:
Accounts and notes receivable from purchaser......................................... 1,790
Accounts and note receivable from FSU joint ventures................................. (1,740)
Accounts payable -- trade............................................................ 78
Treasury stock....................................................................... 8,756
Sale of inventories, property and equipment and technologies to Syntron, Inc. resulting
in an increase (decrease) in:
Accounts and notes receivable -- deferred credits.................................... 3,255
Materials and supplies inventory..................................................... (2,154)
Other assets -- deferred credits receivable.......................................... 857
Accounts payable -- trade............................................................ 957
Other accrued liabilities -- deferred gain........................................... 891
Other non-current liabilities -- deferred gain....................................... 110
Sale of accounts receivable and property and equipment resulting in a decrease in:
Accounts and notes receivable........................................................ (78)
Property and equipment -- net........................................................ (247)
Long-term debt....................................................................... (199)
Accounts payable -- trade............................................................ (18)
Other non-current liabilities........................................................ (108)
Increase in additional paid-in capital as a result of warrants issued with
short-term related party loans....................................................... 89
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest --
Equipment purchase obligations..................................................... 1,538 1,280 1,878
Secured term loans................................................................. 585 635 506
Credit agreements.................................................................. 461 1,723 1,843
Short-term related party loans..................................................... 206 199
Other.............................................................................. 339 1,388 1,286
Income taxes......................................................................... 1,272 2,276 5,086
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-7
<PAGE> 71
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
EARNINGS CUMULATIVE
COMMON STOCK ISSUED TREASURY STOCK, (DEFICIT) (FROM FOREIGN
------------------- AT COST ADDITIONAL AUGUST 1, 1991 CURRENCY
PAR -------------------- PAID-IN WITH RESPECT TO TRANSLATION
SHARES VALUE SHARES AMOUNT CAPITAL DIGICON INC.) ADJUSTMENT
----------- ----- ---------- ------- -------- ---------------- ----------
(AS COMBINED -- SEE NOTE 2)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1993
(AS PREVIOUSLY REPORTED BY DIGICON
INC.)................................ 28,279,323 $ 283 $ 62,138 $ 3,296
Pooling of interests with Veritas
Energy Services Inc. ................ 483 3,394 $ (215)
Common stock issued for investment in
FSU joint ventures, net of issue
costs................................ 3,072,950 31 7,228
Exchangeable stock issued for cash, net
of issue costs -- Veritas Energy
Services Inc. ....................... 28,255
Exchangeable stock issued for cash
under employee purchase
plan -- Veritas Energy Services
Inc. ................................ 9
Exchangeable stock issued for cash
under employee stock option
plan -- Veritas Energy Services
Inc. ................................ 127
Cumulative foreign currency translation
adjustment........................... (158)
Net loss............................... (10,354)
--------- ---- -------- ------ ------- -------- ------
BALANCE, JULY 31, 1994................. 31,352,273 314 -- -- 98,240 (3,664) (373)
</TABLE>
(Continued)
F-8
<PAGE> 72
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
EARNINGS CUMULATIVE
COMMON STOCK ISSUED TREASURY STOCK, (DEFICIT) (FROM FOREIGN
------------------- AT COST ADDITIONAL AUGUST 1, 1991 CURRENCY
PAR -------------------- PAID-IN WITH RESPECT TO TRANSLATION
SHARES VALUE SHARES AMOUNT CAPITAL DIGICON INC.) ADJUSTMENT
----------- ----- ---------- ------- -------- --------------- ----------
(AS COMBINED -- SEE NOTE 2)
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for investment in
FSU joint ventures, net of issue
costs................................ 2,052,543 20 2,265
One for three reverse stock split, net
of issue costs....................... (22,269,877) (223) 175
Warrants issued in conjunction with
short-term related party loans....... 89
Exchangeable stock issued for cash
under employee purchase
plan -- Veritas Energy Services
Inc. ................................ 28
Common stock reacquired in sale of
investment in FSU joint ventures..... (1,708,497) $(8,756)
Treasury stock issued for cash......... 850,000 3,984
Cumulative foreign currency translation
adjustment........................... 307
Net income............................. 5,594
---------- ---- -------- ------ ------- -------- ------
BALANCE, JULY 31, 1995................. 11,134,939 111 (858,497) (4,772) 100,797 1,930 (66)
Treasury stock issued for cash, net of
issue costs.......................... 858,497 4,772 (800)
Common stock issued for cash upon
exercise of warrants................. 29,433 530
Common stock issued for cash under
employee stock option plan........... 181,497 2 2,448
Common stock certificates
cancelled............................ (11,517)
Registration and filing costs.......... (30)
Exchangeable stock issued for cash
under employee stock purchase plan --
Veritas Energy Services Inc.......... 12
Exchangeable stock issued for cash
under employee stock option
plan -- Veritas Energy Services
Inc.................................. 1,512
Cumulative foreign currency translation
adjustment........................... (868)
Net income............................. 1,281
Adjustment to conform fiscal year of
Veritas Energy Services Inc.......... (936)
---------- ---- -------- ------ ------- -------- ------
BALANCE, JULY 31, 1996................. 11,334,352 $ 113 $104,469 $ 2,275 $ (934)
========== ==== ======== ====== ======= ======== ======
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-9
<PAGE> 73
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1994, 1995 AND 1996
AS COMBINED -- SEE NOTE 2
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying supplemental consolidated financial statements include the
accounts of Veritas DGC Inc., formerly Digicon Inc., ("the Company") and all
majority-owned domestic and foreign subsidiaries. Investments in 50% or
less-owned companies and joint ventures are accounted for on the equity method.
All material intercompany balances and transactions have been eliminated.
All financial information for all periods presented prior to the merger on
August 30, 1996 between Digicon Inc. ("Digicon") and Veritas Energy Services
Inc. ("VES") includes the results of VES. (See Note 2). The merger has been
accounted for as a pooling of interests. These supplemental consolidated
financial statements will become the primary historical consolidated financial
statements of Veritas DGC Inc. upon issuance of consolidated financial
statements for a period that includes the date of consummation, August 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and restricted cash
investments, accounts and notes receivable, accounts payable and debt. For all
such instruments the carrying value is a reasonable estimate of fair value.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified for consistent
presentation.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable intangibles
to be disposed of. This statement is effective for financial statements with
fiscal years beginning after December 15, 1995. The Company will be required to
implement this statement for the fiscal year 1997. Implementation of this
pronouncement is not expected to have a material effect on the Company's
supplemental consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." This statement establishes a fair value method of accounting for
stock-based compensation plans either through recognition or disclosure. This
statement is effective for fiscal years beginning after December 15, 1995. The
Company will be required to implement this statement for the fiscal year 1997.
The Company intends to adopt this standard by disclosing the pro forma net
income (loss) and net income (loss) per share amounts assuming the fair value
method was adopted on August 1, 1995. The adoption
F-10
<PAGE> 74
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
of this statement will have no material impact on the Company's supplemental
consolidated financial statements.
TRANSLATION OF FOREIGN CURRENCIES
The Company has determined that the U.S. dollar is its primary functional
currency and, accordingly, most foreign entities translate property and
equipment (and related depreciation) and inventories into U.S. dollars at the
exchange rate in effect at the time of their acquisition while other assets and
liabilities are translated at year-end rates. Operating results (other than
depreciation) are translated at the average rates of exchange prevailing during
the year and remeasurement gains and losses are included in the determination of
net income and are reflected in other costs and expenses (See Note 16). The
remaining foreign entities use the Canadian dollar as the functional currency
and translate all assets and liabilities at year-end exchange rates and
operating results at average exchange rates prevailing during the year.
Adjustments resulting from the translation of assets and liabilities are
recorded in the cumulative foreign currency translation adjustment account in
the stockholders' equity section.
CASH EQUIVALENTS
For purposes of the Supplemental Consolidated Statements of Cash Flows, the
Company has defined "cash equivalents" as items readily convertible into known
amounts of cash with original maturities of three months or less.
RESTRICTED CASH INVESTMENTS
Restricted cash investments in the amounts of $670,000 and $327,000 at July
31, 1995 and 1996, respectively, were pledged as collateral on certain bank
guarantees.
ACCOUNTS RECEIVABLE
Included in accounts and notes receivable at July 31, 1995 and 1996 are
unbilled amounts of approximately $11,036,000 and $12,682,000, respectively.
Such amounts are either not billable to the customer at July 31 in accordance
with the provisions of the contract and generally will be billed in one to four
months or are currently billable and will be invoiced in the next monthly
statement cycle.
INVENTORIES
Inventories of materials and supplies are stated at the lower of average
cost or market.
MULTI-CLIENT DATA LIBRARY
The Company collects and processes certain seismic data for its own account
to which it retains all ownership rights and which it resells to clients on a
non-transferable, non-exclusive basis. The Company may obtain precommitted sales
contracts to help fund the cash requirements of these surveys which generally
last from 5 to 7 months. The Company capitalizes the unfunded portion using an
estimated sales method. Under that method the amount capitalized equals actual
costs incurred less costs attributed to the precommitted sales contracts based
on the percentage of total estimated costs to total estimated sales multiplied
by actual sales. The capitalized cost of multi-client data library is likewise
charged to operations in the period subsequent sales occur based on the
percentage of total estimated costs to total estimated sales multiplied by
actual sales. The Company periodically reviews the carrying value of the
multi-client data library to assess whether there has been a permanent
impairment of value
F-11
<PAGE> 75
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
and records losses when the total estimated costs exceed total estimated sales
or when it is determined that estimated sales would not be sufficient to cover
the carrying value of the asset. In general, costs are expected to be recovered
from sales over a period of less than 5 years.
GOODWILL
The Company records the purchase price of businesses or joint venture
interests in excess of the fair value of net assets acquired as goodwill which
is amortized over a period of 10 to 20 years which approximates the period
benefits are expected to be derived. The Company periodically reviews the
carrying value of goodwill in relation to the current and expected operating
results of the businesses or joint ventures in order to assess whether there has
been a permanent impairment of such amounts. There were no write-downs as a
result of such review during the years ended July 31, 1994, 1995 or 1996.
See Notes 4 and 5 relating to the purchase of the investment in the FSU
joint ventures and in Data Graphics Ltd.
MOBILIZATION COST
Transportation and make-ready expenses of seismic operations incurred prior
to commencement of business in an area, that would not have been incurred
otherwise, are deferred and amortized over the lesser of the term of the related
contract or backlog of contracts in that area or one year. Amounts applicable to
operations for the Company's own account are included in the cost of the
multi-client data library. Unamortized mobilization costs are shown as other
assets and totaled $1,421,000 and $517,000 at July 31, 1995 and 1996,
respectively.
INCOME TAXES
The Company's policy is not to provide for the income taxes, if any, which
would be payable if undistributed earnings of foreign consolidated subsidiaries
were paid as dividends to the parent company, since such earnings have been or
will be reinvested in the business.
In February 1992, the FASB issued SFAS 109 "Accounting for Income Taxes",
which requires the use of the "liability method" in place of the previously
required "deferred method". Under the liability method, deferred income taxes
reflect the net tax effects of (a) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and (b) operating loss and tax credit
carryforwards. SFAS 109 allows recognition of all or a portion of benefits from
net operating loss carryforwards as deferred tax assets if realization is "more
likely than not". In periods of changing income tax rates, the liability method
will cause fluctuations in net income of companies with deferred taxes. The
Company adopted SFAS 109 effective August 1, 1993. The adoption of this standard
did not result in a cumulative effect adjustment to equity or income for the
year ended July 31, 1994.
Recognition will be given in the accompanying supplemental consolidated
balance sheets to the future income tax benefits of loss carryforwards only to
the extent that they will be used to offset existing deferred taxes. Since the
Company's quasi-reorganization with respect to Digicon Inc. on July 31, 1991, in
accordance with Staff Accounting Bulletin No. 86, the tax benefits of loss
carryforwards existing at the date of the quasi-reorganization, when realized,
have been recognized in the supplemental consolidated statements of operations
by a charge in lieu of income taxes, representing the additional income taxes
which otherwise would have been provided, with an equal and offsetting direct
addition to paid-in capital reflecting the utilization of the loss carryforward.
F-12
<PAGE> 76
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
Operating leases include those for office space, specialized seismic
equipment rented for short periods of time, and the Company's seismic ships
which generally are chartered on a short-term basis.
QUASI-REORGANIZATION
Digicon effected a quasi-reorganization adjustment as of July 31, 1991 in
which its accumulated deficit at July 31, 1991 of $139,751,000 was offset
against additional paid-in capital.
REVENUES
Revenues are recognized based on the percentage of completion method.
Revenues from data acquisition and data processing services are recognized based
on contractual rates set forth in the related contract if the contract provides
a separate rate for each service group. If the contract only provides a rate for
the overall service, revenues are recognized based on the percentage of each
service group's cost to the total cost.
DEPRECIATION
Depreciation is computed using the straight-line method based on estimated
useful lives as follows:
<TABLE>
<CAPTION>
AVERAGE
YEARS
----
<S> <C>
Seismic equipment..................................... 4-5
Data processing equipment............................. 3-6
Leasehold improvements and other...................... 3-8
</TABLE>
Expenditures for routine repairs and maintenance are charged to expense as
incurred; expenditures for additions and improvements are capitalized and
depreciated over the estimated useful life of the related asset. Significant
vessel drydocking expenses are recorded as deferred charges in other assets and
are amortized over a six to twenty-four month period. The net gain or loss on
items of property and equipment retired or disposed of is included in other
costs and expenses. See Note 16.
In fiscal 1994 and 1996, the Company recognized impairment of assets in the
amount of $5,235,000 and $3,628,000, respectively or $.33 and $.20 per share (as
restated for the Reverse Split), respectively. See Notes 12 and 15.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense when incurred.
Research and development costs for the years ended July 31, 1994, 1995 and 1996
were $5,764,000, $3,589,000 and $3,193,000, respectively.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share and weighted average shares have been restated
for all periods presented to reflect the effect of the Reverse Split consummated
on January 17, 1995 (see Note 12) and shares issuable upon exchange of the
Veritas Energy Services Inc. Exchangeable Stock (see Note 2).
Primary loss per share is computed based on the weighted average number of
shares of common stock. Primary earnings per share is computed based on the
weighted average number of shares of common stock plus common stock equivalents.
Common stock equivalents include (i) stock options (see Note 11), (ii) warrants
(see Note 14) and (iii) contingent shares issuable (see Note 4). Shares
F-13
<PAGE> 77
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
issuable upon the conversion of stock options and warrants were disregarded
since the treasury stock method of calculation resulted in dilution of less than
3%. For the year ended July 31, 1994, contingent shares issuable discussed in
Note 4 were disregarded due to net losses incurred.
Fully diluted earnings per share is not presented for the year ended July
31, 1994 due to net losses incurred. Fully diluted earnings per share is not
presented for the years ended July 31, 1995 and 1996 since stock options and
warrants referenced above resulted in dilution of less than 3%.
2. BUSINESS COMBINATION
Veritas DGC Inc. was formerly named Digicon Inc. ("Digicon"). On August 30,
1996, Digicon and Veritas Energy Services Inc., a Canadian company, consummated
a business combination (the "Combination"). VES became a wholly owned subsidiary
of Digicon and Digicon changed its name to Veritas DGC Inc. (the "Company"). As
a result of the Combination, each share of VES no par value common shares
outstanding was converted into the right to receive VES no par value
exchangeable stock (the "Exchangeable Stock") at an exchange ratio of 0.8 of a
share of Exchangeable Stock per VES common share. All of the holders of VES
common shares, except for those shareholders who perfected and properly
exercised their right to dissent from the Combination and received fair value of
their shares in cash, became holders of Exchangeable Stock and accordingly,
7,023,701 shares of Exchangeable Stock were issued. The aggregate stated capital
of the Exchangeable Stock is equal to the aggregate stated capital immediately
prior to the Combination of the VES common shares that were exchanged or
approximately $30.0 million. The Exchangeable Stock is convertible, at the
discretion of the stockholder, on a one-for-one basis into shares of the
Company's $0.01 par value common stock and their holders have rights identical
to the holders of the Company's common stock. Options to purchase shares of VES
common stock ("VES Option") were converted into options to purchase shares of
the Company's common stock at an exchange ratio of 0.8 of an option in the
Company's common stock per VES Option. See Note 11. The VES articles of
amalgamation were amended to reduce the number of authorized VES common shares
to one which will be held by the Company.
The Combination has been accounted for as a pooling of interests and,
accordingly, the accompanying supplemental consolidated financial statements
have been prepared on a basis that includes the accounts of Digicon and VES.
Information concerning common stock and per share data has been restated on an
equivalent share basis. As a result of differing year ends of Digicon and VES,
results of operations for dissimilar year ends have been combined. Digicon's
results of operations for the years ended July 31, 1994 and 1995 have been
combined with VES' results of operations for the years ended October 31, 1994
and 1995. To conform year ends, Digicon's results of operations for the year
ended July 31, 1996 have been combined with VES' results of operations for the
twelve months ended July 31, 1996 and, accordingly, VES' operating results for
the period August 1, 1995 through October 31, 1995 is included in the years
ended July 31, 1995 and July 31, 1996. An adjustment in an amount equal to the
results of operations for this three-month period is included in the
supplemental consolidated statements of changes in stockholders' equity. VES'
revenues, net income and net income per share were $22,150,000, $936,000 and
$0.05, respectively, for the period August 1, 1995 through October 31, 1995.
Presented below is the effect of the pooling of interests on previously
reported results of operations. Amounts related to VES have been converted into
the Company's reporting currency, United States ("U.S.") dollars, using weighted
average exchange rates prevailing during the period and reflects adjustments for
differences between U.S. and Canadian generally accepted accounting
F-14
<PAGE> 78
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
principles ("GAAP") and reclassifications to conform financial statement
presentation. Canadian to U.S. GAAP adjustments include adjustments to (i) write
off foreign exchange gains and (losses) on borrowings which are deferred and
amortized over the period of the debt affecting net income by approximately
$253,000, ($25,000) and ($173,000) for the years ended July 31, 1994, 1995 and
1996, respectively, and (ii) reverse the effect of a prior period adjustment
affecting net income by approximately ($834,000), $314,000 and $102,000 for the
years ended July 31, 1994, 1995 and 1996, respectively. Reclassification of
$27,213,000, $25,493,000 and $28,842,000 for the years ended July 31, 1994, 1995
and 1996, respectively, have been made to net amounts billed to customers for
reimbursable costs against VES' revenues.
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues:
Digicon................................................ $115,535 $131,127 $160,847
VES.................................................... 90,070 109,996 118,591
Reclassifications...................................... (27,213) (25,493) (28,842)
-------- -------- --------
Total.......................................... $178,392 $215,630 $250,596
======== ======== ========
Net income (loss):
Digicon................................................ $(14,426) $ 2,778 $ 385
VES.................................................... 4,653 2,527 967
Adjustments............................................ (581) 289 (71)
-------- -------- --------
Total.......................................... $(10,354) $ 5,594 $ 1,281
======== ======== ========
Net income (loss) per share:
As previously reported................................. $ (1.48) $ .25 $ .03
======== ======== ========
As restated............................................ $ (.66) $ .31 $ .07
======== ======== ========
</TABLE>
There were no material adjustments to the net assets of VES as a result of
adopting the same accounting principles as the Company.
During the year ended July 31, 1996, the Company incurred and expensed
$3,666,000 of costs associated with the merger. These costs consist primarily of
professional fees.
F-15
<PAGE> 79
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN INDONESIAN JOINT VENTURE
Summarized financial information of this joint venture is as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS OF
DOLLARS)
Current assets............................................... $ 1,492 $ 1,831
Multi-client data library.................................... 468 617
--------- ---------
Total assets....................................... $ 1,960 $ 2,448
========= =========
Current liabilities.......................................... $ 1,192 $ 878
Non-current liabilities:
Other long-term liabilities................................ 635
Advances from Veritas DGC Inc.............................. 12,439 14,532
--------- ---------
Total non-current liabilities...................... 13,074 14,532
Stockholders' deficit:
Common stock............................................... 2,576 2,576
Accumulated deficit........................................ (14,882) (15,538)
--------- ---------
Total stockholders' deficit........................ (12,306) (12,962)
--------- ---------
Total liabilities and stockholders' deficit........ $ 1,960 $ 2,448
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues.......................................... $ 2,518 $ 1,443 $ 2,927
Operating expenses................................ 5,367 5,368 3,429
Depreciation and amortization..................... 1,065 430
Other............................................. 174 196 (15)
-------- -------- --------
Total................................... 6,606 5,994 3,414
-------- -------- --------
Loss before provision for income taxes............ (4,088) (4,551) (487)
Provision for from income taxes................... (359) (166)
-------- -------- --------
Net loss.......................................... $ (4,088) $ (4,910) $ (653)
======== ======== ========
</TABLE>
4. INVESTMENT IN FSU JOINT VENTURES
During the year ended July 31, 1994, the Company entered into a joint
venture agreement with MD Seis International Ltd. to perform geophysical
services in the former Soviet Union ("FSU"). In connection with the agreement,
the Company placed 5,431,615 shares of its pre-Reverse Split common stock in
escrow to be distributed in stages upon the execution and completion of certain
conditions.
The first stage was completed on April 1, 1994 and the Company exchanged
3,072,950 shares of pre-Reverse Split common stock valued at $2.375 per share,
or $7,298,256, and a $1,000,000 cash commitment in return for interests in
certain jointly owned companies. The second stage of the agreement was completed
on August 25, 1994, and the Company increased its ownership interest in certain
of these companies by exchanging 2,052,543 shares of pre-Reverse Split common
stock valued at $1.125 per share, or $2,309,111, and an additional $2,000,000
cash commitment. In addition, the
F-16
<PAGE> 80
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Company agreed to guarantee certain liabilities of the joint ventures. After
adjustment for the Reverse Split consummated on January 17, 1995, MD Seis owned
1,708,497 shares of common stock.
The investments were being accounted for under the equity method. The FSU
joint ventures generated total revenues of approximately $300,000 and $6,994,000
and net losses of approximately $921,000 and $2,954,000 during the years ended
July 31, 1994 and 1995, respectively. The Company's share of net losses was
approximately $391,000 and $1,477,000 during the years ended July 31, 1994 and
1995, respectively. The excess purchase price over the fair value of the net
assets acquired in the amount of $9,292,000 was being amortized over a 20 year
period. Amortization expense for the years ended July 31, 1994 and 1995 was
$100,000 and $392,000, respectively.
On June 6, 1995, the Company sold its interests in the joint ventures for
$6,000,000 in cash and the return of the 1,708,497 shares of the post-Reverse
Split common stock owned by MD Seis (valued at $5.125 per share). In addition,
the Company received $2,992,144 in short-term notes, which were collected on
July 31, 1995, representing payments for equipment sold and a return of amounts
previously advanced to the joint ventures and is entitled to receive royalties
of up to $1,500,000 based on future sales of multi-client data acquired by the
joint ventures. The net effect of these transactions was a gain of $4,370,000
which was recognized during 1995.
5. PURCHASE OF DATA GRAPHICS LTD.
On December 1, 1994, the Company acquired all of the outstanding capital
stock of Data Graphics Ltd., an exploration and development information service
company, for a cash purchase price of $407,000. The acquisition has been
accounted for using the purchase method of accounting, and accordingly, goodwill
of $1,155,000 was recorded representing the excess of the purchase price over
the fair value of the net assets acquired. The goodwill is being amortized over
a ten-year period and the operations of Data Graphics Ltd. are included in the
supplemental consolidated financial statements beginning December 1, 1994.
6. SALE OF INVENTORIES, ASSETS AND TECHNOLOGIES
On August 31, 1994, the Company entered into a series of agreements with
Syntron, Inc. ("Syntron") that provided for the sale of certain assets,
inventories and technologies by the Company to Syntron and the assumption of
certain liabilities by Syntron. The sale price was $7,500,000 payable in cash of
$3,000,000 and credits of $4,500,000 to be applied by the Company against future
purchases from Syntron. The agreements also provide that for a period of three
years, Syntron will be the sole supplier to the Company of certain acquisition,
monitoring and recording equipment that is competitively priced, deliverable on
a timely basis and technologically competitive. In addition, the Company agreed
to lease back certain marine and land recording equipment from Syntron for a
period of up to 36 months with minimum lease terms ranging from 7 1/2 to 17 1/2
months. The difference between the sale price and the net book value of the net
assets sold after discounting the credits by 2 1/2% was a $1,001,000 gain which
was recognized on a pro rata basis over the minimum lease terms as a reduction
in rental expense. Unused credits in the amount of $1,168,000 are included in
accounts and notes receivable at July 31, 1996.
F-17
<PAGE> 81
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS OF
DOLLARS)
Revolving credit agreement due July 1998, at prime plus 1/4%
(8.5% at July 31, 1996)...................................... $ 11,458
Revolving credit agreement due April 1997, at prime plus 3%.... $ 14,123
Secured term loan due July 1999, at prime plus 3/4% (9.0% at
July 31, 1996)............................................... 6,000
Secured term loan due June 1997, at 10.75%..................... 4,500
Secured term loan due July 1999, at prime plus 1/2% (6.75% at
July 31, 1996)............................................... 1,240
Secured term loan due July 1999, at prime plus 1/2% (9.25% at
July 31, 1996)............................................... 2,832
Equipment purchase obligations maturing through July 1999, at a
weighted average rate of 10.28% at July 31, 1996............. 17,720 19,319
Secured term loan due July 1996, at 7.75%...................... 185
Mortgage note payable due October 2005, at 10%................. 260 241
------- -------
Total................................................ 36,788 41,090
Less current maturities........................................ 10,895 13,739
------- -------
Due after one year................................... $ 25,893 $ 27,351
======= =======
</TABLE>
The revolving credit agreement due July 1998 is with a commercial bank and
provides a facility of up to $15,000,000. Advances under the agreement are
limited by a borrowing formula and are collateralized by a majority of the
assets of the Company (except those assets directly or indirectly owned by VES).
The agreement provides for the collection of certain of the Company's accounts
receivable into cash collateral accounts. Amounts applied against outstanding
advances are available for reborrowing upon presentation of evidence of adequate
borrowing base coverage. Interest is payable monthly at prime plus 1/4%. The
agreement limits, among other things, the Company's right, without consent of
the lender, to take certain actions including creating indebtedness in excess of
specified amounts and declaring or paying dividends, and requires the Company to
maintain certain financial ratios. At July 31, 1996, $3,542,000 was available
for borrowing under this agreement.
The revolving credit agreement due April 1997 was with a finance company
and provided a revolving credit facility of up to $17,000,000 (increased from
$15,000,000 in April 1995) through April 11, 1997. The facility was repaid in
July 1996 with proceeds from the revolving credit agreement due July 1998.
The secured term loan due July 1999 is with a commercial bank and is due in
36 monthly installments of $166,667 plus interest at prime plus 3/4% and is
secured by a majority of the assets of the Company (except those assets directly
or indirectly owned by VES).
The secured term loan due June 30, 1997, bore interest at 10.75% payable
quarterly. In connection with the loan, the Company issued common stock purchase
warrants to the lender. See Note 14. The loan was repaid with proceeds from the
secured term loan due July 1999.
The secured term loans due July 1999 provide for advances for equipment
purchases up to Canadian $5.5 million and Canadian $4.0 million, respectively,
and advances are payable in 36 equal monthly installments. Advances bear
interest at the prime rate (as defined) plus .5% and are secured by the
equipment purchased. The agreements require VES to maintain certain financial
ratios. Amounts
F-18
<PAGE> 82
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
available for borrowing under the agreements at July 31, 1996 were $2,760,000
and $76,000, respectively.
The Company's equipment purchase obligations represent installment loans
and capitalized lease obligations primarily related to computer and seismic
equipment.
Annual maturities of long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
ANNUAL
FISCAL YEAR MATURITIES
-------------------------------------------------------------- -------------
<S> <C>
(IN THOUSANDS
OF DOLLARS)
1997........................................................ $ 13,739
1998........................................................ 21,531
1999........................................................ 5,555
2000........................................................ 86
2001........................................................ 29
Thereafter.................................................. 150
-------
Total............................................... $ 41,090
=======
</TABLE>
8. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
tax position are as follows:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1995 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS OF
DOLLARS)
Deferred tax assets:
Difference between book and tax basis of property
and equipment................................... $ 4,544 $ 3,107
Difference between book and tax basis of
multi-client data library....................... 4,526 8,443
Operating loss carryforwards....................... 50,156 45,902
Tax credit carryforwards........................... 5,761 3,580
Other.............................................. 156 1,304
-------- --------
Total...................................... 65,143 62,336
Deferred tax liabilities:
Other.............................................. (840) (1,955)
-------- --------
Net deferred tax assets.............................. 64,303 60,381
Valuation allowance.................................. (65,036) (60,957)
-------- --------
Net deferred tax liability........................... $ (733) $ (576)
======== ========
</TABLE>
F-19
<PAGE> 83
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Current -- U.S........................................ $ 210 $ 277 $ 192
Deferred -- U.S....................................... 39 (264) 395
Current -- Foreign.................................... 5,188 4,320 2,555
Deferred -- Foreign................................... 492 (526) (1,133)
------ ------ ------
Total....................................... $5,929 $3,807 $2,009
====== ====== ======
</TABLE>
As of July 31, 1996, the Company had U.S. net operating loss carryforwards
("NOL's") of approximately $86,890,000 which expire in the years 1998 through
2010, including $73,681,000 of NOL's that existed prior to the
quasi-reorganization. See Note 1. As of July 31, 1996, approximately $3,580,000
of investment tax credit carryforwards, which will expire in the years 1997
through 1999, was available to reduce future U.S. income taxes.
Foreign operations had NOL's of approximately $49,061,000 at July 31, 1996,
which are available indefinitely to reduce future foreign taxable income in
specific jurisdictions including $38,315,000 of NOL's that existed prior to the
quasi-reorganization. See Note 1. The foreign component of income (loss) before
provision for income taxes was $3,221,000, $(844,000) and $(1,256,000) for the
years ended July 31, 1994, 1995 and 1996, respectively.
A reconciliation of income tax expense computed at the statutory rate to
the provision included in the Supplemental Consolidated Statements of Operations
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
1994 1995 1996
------ -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income tax at the statutory rate..................... $ 183 $ 5,105 $ 1,541
Increase (reduction) in taxes resulting from:
Foreign losses with no tax recovery................ 4,221 2,505 4,985
Foreign withholding tax cost....................... 1,400 274
Foreign exchange capital loss...................... 2,410 148 51
Foreign rate adjustment............................ (710) (93) (131)
Non-deductible expenses............................ 419 258 315
Write-off of capital investment in foreign
subsidiary...................................... (5,775) (4,734)
Other.............................................. (594) 259 (292)
------ ------- -------
Total...................................... $5,929 $ 3,807 $ 2,009
====== ======= =======
</TABLE>
IRS regulations restrict utilization of NOL's for any company in which an
"ownership change" (as defined in Section 382 of the Internal Revenue Code) has
occurred. The Company has performed the required testing and has concluded that
an "ownership change" occurred in connection with the issuance of common stock
through a public offering made by the Company on January 6, 1992. As a result,
the future utilization of U.S. NOL's existing at the date of the "ownership
change" will be limited to approximately $4,000,000 per year. This limitation
had no effect on the provision for income taxes for the years ended July 31,
1994, 1995 and 1996. To the extent that any portion of this annual limitation is
not used in any year, it may be carried over and added to the annual limitation
of succeeding years. At July 31, 1996, the accumulated unused limitation on
NOL's existing at the date of the "ownership change" was approximately
$16,003,000.
F-20
<PAGE> 84
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
9. DEFERRED CREDITS
In August 1992, the Company entered into agreements with a customer
pursuant to which the Company received certain seismic equipment with a fair
value of approximately $1,792,000 and was obligated to allow $7,800,000 in
discounts at specified rates on future seismic services performed by the Company
for such customer. The Company recorded deferred revenue equal to the fair value
of seismic equipment at the time the equipment was received. The deferred
revenue is amortized as an adjustment to revenues at a rate determined by the
ratio of revenues generated by the customer during a reporting period to total
revenues estimated to be generated by the customer under the agreements.
Revenues are recognized net of discounts allowed as the customer purchases
seismic services eligible for the discounts. At July 31, 1996, remaining
discounts in the amount of $3,041,000 were available to such customer and the
remaining unrecognized deferred revenue is $363,000.
The Company also has $880,000 and $962,000 at July 31, 1995 and 1996,
respectively, included in other accrued liabilities relating to deferred credits
earned by certain customers in conjunction with their original participation in
certain of the Company's multi-client data surveys. These credits may be applied
by the customers against future invoiced amounts.
10. COMMITMENTS AND CONTINGENT LIABILITIES
Total rentals of vessels, equipment and office facilities charged to
operations amounted to $22,631,000, $27,651,000 and $28,210,000 for the years
ended July 31, 1994, 1995 and 1996, respectively.
Minimum rentals payable under operating leases, principally for office
space and vessel charters with remaining noncancellable terms of at least one
year are as follows:
<TABLE>
<CAPTION>
FISCAL MINIMUM
YEAR RENTALS
---------- -------------
(IN THOUSANDS
OF DOLLARS)
<S> <C>
1997.................................................................. $15,268
1998.................................................................. 9,650
1999.................................................................. 8,373
2000.................................................................. 4,222
2001.................................................................. 628
2002-2013............................................................... 6,745
</TABLE>
In connection with the Company's 1997 capital expenditure program, the
Company has commitments of $5,382,000 outstanding at July 31, 1996.
The Company has an employment agreement with a former employee, who was
also a director, that provided for salary payments of $25,417 per month plus
certain employee benefits through December 31, 1995. The agreement also contains
a non-compete clause for a subsequent period of three years during which time
the former employee will receive payments of $12,709 per month plus certain
employee benefits.
During 1993 the Company purchased an occurrence-based workers compensation
insurance policy. The policy provides for a maximum deductible of $1.1 million,
$1.4 million and $1 million for the policy years ended August 31, 1994, 1995 and
1996, respectively. Management has evaluated the adequacy of the accrual for the
liability for incurred but unreported workers compensation claims and has
F-21
<PAGE> 85
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
determined that the ultimate resolution of any such claims would not have a
materially adverse impact on the financial position of the Company.
11. EMPLOYEE BENEFITS
The Company maintains a 401(k) plan in which employees of Digicon's
majority-owned domestic subsidiaries and certain foreign subsidiaries are
eligible to participate. However, employees of Digicon's foreign subsidiaries
who are covered under a foreign deferred compensation plan are not eligible.
Employees are permitted to make contributions of up to 10% of their salary to a
maximum of $9,240 per year. Generally, the Company will contribute an amount
equal to one-half of the employee's contribution up to $6,000 or 6% of the
employee's salary (whichever is less); however, if consolidated pre-tax income
for any fiscal year is less than the amount required to be contributed by the
Company, the Company may elect to reduce its contribution, but in no event may
it reduce the total contribution to less than 25% of the employee contribution.
The Company may make additional contributions from its current or cumulative net
profits in an amount to be determined by the Board of Directors. Employer
matching contributions to the 401(k) plan were $286,000 in 1994, $281,000 in
1995 and $314,000 in 1996.
The Company initiated an employee nonqualified stock option plan on
September 1, 1992. Options are granted to Digicon's officers and key employees
and are exercisable no earlier than six months after the date of grant. The
option price per share shall not be less than the lesser of (i) fair market
value of the common stock on the date the option is granted or (ii) the average
fair market value for the common stock during the 30 trading days ending on the
trading day next preceding the date the option is granted. Options expire ten
years from the date of grant. The exercise prices and number of options existing
prior to January 17, 1995 have been adjusted for the Reverse Split. See Note 12.
The Company has authorized 1,158,333 shares of post-Reverse Split common stock
to be issued under the plan.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ------------
<S> <C> <C>
Balance, August 1, 1994........................... 489,333 $13.50
Options issued.................................. 13,333 $6.00
Options cancelled............................... (79,666) $13.50
-------
Balance, July 31, 1995............................ 423,000 $6.00-$13.50
Options issued.................................. 195,500 $5.25
Options cancelled............................... (31,680) $5.25-$13.50
Options exercised............................... (181,497) $13.50
-------
Balance, July 31, 1996............................ 405,323 $5.25-$13.50
=======
Options exercisable, July 31, 1996................ 234,823
=======
</TABLE>
F-22
<PAGE> 86
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The Company also initiated a stock option plan for Digicon's non-employee
directors (the "Director Plan") providing for stock options to be granted to
each non-employee director of the Company. The Director Plan provides that on
December 31 of each year, each eligible director shall be granted an option to
purchase 3,333 shares of the Company's post-Reverse Split common stock, subject
to an aggregate limit of 16,667 shares for each director. The exercise price for
each option granted shall be the average closing price of the common stock for
the 30 trading days prior to the date of grant. The exercise prices of options
existing prior to January 17, 1995 have been adjusted for the Reverse Split.
Options may be exercised at any time (i) after the later of six months following
the date of grant or the first anniversary of the director's service on the
board and (ii) before the sixth anniversary of the date of grant, when the
option expires. No options under the Director Plan have been exercised. The
Company has authorized 200,000 shares of post-Reverse Split common stock to be
issued under the Director Plan.
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE
OPTIONS PRICE
------ ------------
<S> <C> <C>
Balance, August 1, 1994............................. 36,667 $6.72-$12.87
Options issued.................................... 19,998 $4.13
------
Balance, July 31, 1995.............................. 56,665 $4.13-$12.87
Options issued.................................... 19,994 $6.76
------
Balance, July 31, 1996.............................. 76,659 $4.13-$12.87
======
Options exercisable, July 31, 1996.................. 76,659
======
</TABLE>
The Company maintains a contributory defined benefit pension plan (the
"Pension Plan") for eligible participating employees in Digicon's United Kingdom
offices. Monthly contributions by employees are equal to 3.5% of their salaries
with the Company providing an additional contribution in an actuarially
determined amount necessary to fund future benefits to be provided under the
Pension Plan. Benefits provided are based upon 1/60 of the employee's final
pensionable salary (as defined) for each complete year of service up to 2/3 of
the employee's final pensionable salary and increase annually at 5%. The Pension
Plan also provides for 50% of such actual or expected benefits to be paid to a
surviving spouse upon the death of a participant. Pension Plan assets consist
mainly of investments in marketable securities which are held and managed by an
independent trustee. The net periodic pension costs are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Service costs (benefits earned during the
period)........................................ $ 288 $ 275 $ 224
Interest costs on projected benefit obligation... 249 253 292
Return on assets................................. (226) (275) (312)
Net amortization and deferral.................... 4 5 5
----- ----- -----
Net periodic pension costs....................... $ 315 $ 258 $ 209
===== ===== =====
</TABLE>
F-23
<PAGE> 87
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the Pension Plan is as follows:
<TABLE>
<CAPTION>
JULY JULY
31, 31,
1995 1996
------ ------
<S> <C> <C>
(IN THOUSANDS OF
DOLLARS)
Plan assets at fair value................................. $3,444 $4,029
Actuarial present value of accumulated vested benefit
obligations............................................. 3,026 3,696
Effect of future salary increases......................... 517 633
------ ------
Projected benefit obligation............................ 3,543 4,329
------ ------
Projected benefit obligation in excess of plan assets..... (99) (300)
Unrecognized prior service cost........................... 13 179
------ ------
Pension liability......................................... $ (86) $ (121)
====== ======
</TABLE>
The weighted average assumptions used to determine the projected benefit
obligation and the expected long-term rate of return on assets for the years
ended July 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<S> <C>
Discount rate........................................................ 8.5%
Rates of increase in compensation levels............................. 6.5%
Expected long-term rate of return on assets.......................... 9.0%
</TABLE>
At the date of combination (see Note 2), options to purchase VES Common
Stock ("VES Option") were converted into options to purchase shares of the
Company's common stock at an exchange ratio of 0.8 of an option in the Company's
common stock per VES Option. All options are immediately exercisable and expire
at varying times through February 2006. Options to purchase the Company's common
stock converted from VES Options are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ------------
<S> <C> <C>
Balance, August 1, 1994........................... 224,680 $7.28
Options issued.................................. 200,016 $7.28
Options cancelled............................... (27,098) $7.28
-------
Balance, July 31, 1995............................ 397,598 $7.28
Options issued.................................. 184,666 $5.79-$7.16
Options cancelled............................... (19,732) $5.79-$7.28
Options exercised............................... (206,674) $5.79-$7.28
-------
Balance, July 31, 1996............................ 355,858 $5.79-$7.28
=======
</TABLE>
12. REVERSE STOCK SPLIT
On December 14, 1994, shareholders approved a one for three reverse stock
split (the "Reverse Split") to holders of record on January 17, 1995, with no
change in par value. On January 17, 1995, there were 33,404,816 shares of common
stock outstanding which were converted into 11,134,939 shares of post-Reverse
Split common stock. The net effect of these transactions was a charge to common
stock and a credit to additional paid-in capital of approximately $223,000. All
references to
F-24
<PAGE> 88
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
the number of shares and per share amounts have been retroactively adjusted for
the effects of the Reverse Split unless otherwise indicated.
On January 17, 1995, there were 1,363,637 publicly traded common stock
purchase warrants expiring on July 5, 1996 with an exercise price of $6.00 per
share. In connection with the Reverse Split and as required by the American
Stock Exchange, the publicly traded warrants were converted, effective January
17, 1995, into approximately 454,545 post-Reverse Split common stock purchase
warrants with an exercise price of $18.00. Also on January 17, 1995, there were
340,000 common stock purchase warrants expiring on June 29, 1997 with an
exercise price of $2.00 per share which were adjusted in connection with the
Reverse Split to represent 113,333 shares of post-Reverse Split common stock
issuable upon exercise of these warrants at an exercise price of $6.00.
Additionally, there were 1,975,000 and 600,000 shares of pre-Reverse Split
common stock authorized under the 1992 Employee Nonqualified Stock Option Plan
and 1992 Non-Employee Director Stock Option Plan, respectively. In connection
with the Reverse Split, these authorized shares were decreased to 658,333 and
200,000 authorized shares of post-Reverse Split common stock under the Employee
Plan and Director Plan, respectively, and the new exercise prices were tripled.
13. COMMON AND PREFERRED STOCK
See Note 12 relating to the Reverse Split consummated on January 17, 1995.
See also Note 4 relating to the issuance of pre-Reverse Split common stock
for the purchase of investment in FSU joint ventures.
In June 1995, 850,000 shares of treasury stock were sold to an
institutional investor at a price of $4.6875 per share.
In September 1995, the Company sold its remaining 858,497 shares of
treasury stock to a group of institutional investors at a price of $4.6875 per
share.
In January 1996, the Company cancelled 11,517 shares of common stock and
22,473 warrants previously held by an escrow agent for issuance in conjunction
with the cancellation of a previous issue of common and preferred stock and
certain other liabilities in 1991.
The board of directors, without any action by the stockholders, is
authorized to issue up to 1 million shares of preferred stock, par value, $.01,
in one or more series and to determine the voting rights, preferences as to
dividends and in liquidation and the conversion and other rights of such stock.
There are no shares of preferred stock outstanding as of July 31, 1996.
14. WARRANTS
The following number of warrants issued and exercise prices have been
adjusted for the Reverse Split consummated on January 17, 1995. See Note 12.
In conjunction with the cancellation of a previous issue of common and
preferred stock and certain other liabilities, the Company authorized 454,545
warrants which could be exercised for 454,545 shares of common stock. The
warrants were issued for a term of five years beginning July 5, 1991 at an
exercise price of $18.00 per share. The warrants could only be exercised for
cash. Warrants for 29,433 shares were exercised on July 5, 1996 and the
remaining warrants expired.
In conjunction with the Company's secured term loan due June 30, 1997, the
Company issued 113,333 warrants which expire June 29, 1997. The warrants were
exercisable for cash at a price of
F-25
<PAGE> 89
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
$18.00 per share. In conjunction with an amendment to the loan in August 1994,
which revised certain financial ratio covenants, the exercise price of the
warrants was reduced to $6.00 per share.
In conjunction with certain short-term related party loans, the Company
issued warrants to purchase 120,000 common shares to the lenders. The warrants
may be exercised for cash at a price of $4.50 per share and will expire July 26,
1999.
15. WRITE-OFF/WRITE-DOWN OF ASSETS AND RESTRUCTURING CHARGES
In connection with the Combination, management committed the Company to a
plan to upgrade its seismic data processing hardware. Certain equipment is
scheduled to be replaced by October 1996. During July 1996, the Company
recognized impairment of $3,628,000 relating to the abandonment of the equipment
to be replaced.
In response to operating losses in certain markets which adversely impacted
the Company's liquidity during the year ended July 31, 1994, management made a
decision to restructure its operations and revalue certain assets in April 1994
and accordingly incurred $7,261,000 in total expenses relating to such decision.
Costs of $1,188,000 are included in cost of services and include non-recurring
expenses associated with certain contract liabilities. Also included in the
$7,261,000 is $5,235,000 for the write-off/write-down for the impairment of
assets to their net realizable value. A portion of the write-off pertains to
marine ($2,437,000) and land ($552,000) acquisition assets related to
decommissioned marine vessels and stacked land crews. The write-off/write-down
for impairment of assets also includes the write-down of certain other marine
and land acquisition assets that were not a direct result of the restructuring
program ($1,048,000). In addition, the Company wrote down data processing
equipment ($1,198,000), particularly in the Far East, based on the declining
market. The remaining costs are restructuring charges of $838,000 which relates
to severance costs for a reduction in the Company's workforce of 82 employees.
Employees to be terminated are from the processing centers, marine and land
crews, marine support, manufacturing, research and development and corporate
groups. As of July 31, 1996, 79 employees have been terminated and $670,000 in
severance costs have been paid. The Company estimates that all remaining
liabilities in the amount of $168,000 will be paid during fiscal 1997.
16. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------
1994 1995 1996
-------- ------ ------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Net foreign currency exchange (gains) losses............ $ 554 $ 290 $ (156)
Net (gain) loss on disposition of property and
equipment............................................. (1,592) 919 875
Interest income......................................... (540) (943) (547)
Other................................................... (255) (34) 374
-------- ------ ------
Total......................................... $ (1,833) $ 232 $ 546
======== ====== ======
</TABLE>
F-26
<PAGE> 90
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
17. GEOGRAPHICAL INFORMATION
Substantially all of the Company's operations consist of geophysical
services. The following tables provide relevant information for the years ended
July 31, 1994, 1995 and 1996, grouped by major geographic areas. Intersegment
sales between geographic areas are valued at current market prices.
<TABLE>
<CAPTION>
REVENUES
---------------------------------------- OPERATING
UNAFFILIATED INTERSEGMENT PROFIT IDENTIFIABLE
CUSTOMERS SALES TOTAL (LOSS) ASSETS
------------- ------------ ---------- --------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1994:
Geographic areas:
Europe & Middle East........ $ 29,891 $ 1,697 $ 31,588 $ (3,120) $ 28,848
Far East.................... 16,958 16,958 (7,851) 15,155
South America............... 17,669 17,669 (556) 16,545
Canada...................... 46,501 26 46,527 8,241 26,048
Eliminations................ (1,697) (1,697)
--------- -------- --------- --------- ---------
Totals................. 111,019 26 111,045 (3,286) 86,596
United States............... 67,373* 1,936 69,309* 7,968 69,365
Eliminations................ (1,962) (1,962)
--------- -------- --------- --------- ---------
Totals................. 178,392 178,392 4,682 155,961
Corporate, general and
administrative expenses..... (2,762)
Interest....................... (3,213)
Other.......................... 1,833
Income taxes................... (5,929)
Investments in 50% or
less-owned companies and
joint ventures.............. (4,965) 9,639
Corporate assets............... 6,214
--------- -------- --------- --------- ---------
Totals................. $ 178,392 $ $ 178,392 $ (10,354) $ 171,814
========= ======== ========= ========= =========
</TABLE>
- ---------------
* Includes export sales of $1,501.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1994. Operating profit (loss) includes
restructuring charges and write-off/writedown for impairment of assets of
$182,000 for Europe & Middle East, $1,416,000 for Far East, and $5,663,000 for
United States. Depreciation and amortization expense was $4,214,000 for Europe &
Middle East, $877,000 for Far East, $1,730,000 for South America, $4,927,000 for
Canada, and $7,350,000 for United States. Capital expenditures were $2,031,000
for Europe & Middle East, $444,000 for Far East, $2,291,000 for South America,
$16,481,000 for Canada and $8,514,000 for United States.
F-27
<PAGE> 91
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
REVENUES
---------------------------------------- OPERATING
UNAFFILIATED INTERSEGMENT PROFIT IDENTIFIABLE
CUSTOMERS SALES TOTAL (LOSS) ASSETS
------------ ------------ --------- --------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1995:
Geographic areas:
Europe & Middle East........... $ 20,230 $ 579 $ 20,809 $ 2,188 $ 11,976
Far East....................... 25,918 22 25,940 2,621 21,199
South America.................. 37,867 83 37,950 68 26,735
Canada......................... 44,297 148 44,445 4,656 27,617
Eliminations................... (601) (601)
--------- ------ --------- -------- ---------
Totals.................... 128,312 231 128,543 9,533 87,527
United States.................. 87,318* 387 87,705* 8,389 90,522
Eliminations................... (618) (618)
--------- ------ --------- -------- ---------
Totals.................... 215,630 215,630 17,922 178,049
Corporate, general and
administrative expenses........ (2,303)
Interest.......................... (5,170)
Gain on sale of investment in FSU
joint ventures................. 4,370
Other............................. (232)
Income taxes...................... (3,807)
Investments in 50% or less-owned
companies and joint ventures... (5,186) 187
Corporate assets.................. 6,104
--------- ------ --------- -------- ---------
Totals.................... $ 215,630 $ $ 215,630 $ 5,594 $ 184,340
========= ====== ========= ======== =========
</TABLE>
- ---------------
* Includes export sales of $2,228.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1995. During 1995, depreciation and amortization
expense was $3,984,000 for Europe & Middle East, $1,040,000 for Far East,
$4,390,000 for South America, $6,001,000 for Canada and $7,919,000 for United
States. Capital expenditures were $1,709,000 for Europe & Middle East,
$1,240,000 for Far East, $6,651,000 for South America, $10,531,000 for Canada
and $13,502,000 for United States.
F-28
<PAGE> 92
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
REVENUES
-------------------------------------- OPERATING
UNAFFILIATED INTERSEGMENT PROFIT IDENTIFIABLE
CUSTOMERS SALES TOTAL (LOSS) ASSETS
--------- -------- --------- -------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1996:
Geographic areas:
Europe & Middle East......... $ 37,394 $ 1,532 $ 38,926 $ 7,220 $ 35,463
Far East..................... 30,558 30,558 1,055 23,590
South America................ 36,346 92 36,438 (1,915) 29,758
Canada....................... 47,423 87 47,510 3,683 30,666
--------- -------- --------- -------- ---------
Totals.................. 151,721 1,711 153,432 10,043 119,477
United States................ 98,875* 61 98,936* 6,910 77,561
Eliminations................. (1,772) (1,772)
--------- -------- --------- -------- ---------
Totals.................. 250,596 250,596 16,953 197,038
Corporate, general and
administrative expenses...... (2,872)
Interest........................ (5,466)
Merger related costs............ (3,666)
Other........................... (546)
Income taxes.................... (2,009)
Investments in 50% or less-owned
companies and joint
ventures..................... (1,113) 1,463
Corporate assets................ 91
--------- -------- --------- -------- ---------
Totals.................. $ 250,596 $ $ 250,596 $ 1,281 $ 198,592
========= ======== ========= ======== =========
</TABLE>
- ---------------
* Includes export sales of $4,774.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1996. During 1996, Operating profit (loss)
includes write-off/write-down for impairment of assets of $2,091,000 for Europe
& Middle East, $1,127,000 for Far East and $410,000 for United States.
Depreciation and amortization expense was $5,182,000 for Europe & Middle East,
$1,707,000 for Far East, $4,655,000 for South America, $7,689,000 for Canada and
$7,682,000 for United States. Capital expenditures were $4,088,000 for Europe &
Middle East, $6,795,000 for Far East, $4,734,000 for South America, $3,657,000
for Canada and $13,586,000 for United States.
F-29
<PAGE> 93
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
18. RELATED PARTY TRANSACTIONS
During fiscal 1994, the Company entered into two credit facilities with
shareholders SOROS Capital L.P., CCF Jupiter L.P. and Jupiter Management Co.,
Inc. (collectively, "the Lenders"). In November 1993, the Company executed a
secured term loan agreement with the Lenders which provided loans totaling
$3,386,000. The loans were repaid in full in April 1994, and the facility was
terminated. In July 1994, the Company executed a second secured loan agreement
with the Lenders providing up to $3,000,000 of advances. The second facility was
repaid in full in June 1995. In connection with the second facility, the Lenders
received warrants to purchase the Company's common stock. See Note 14. During
the fiscal year ended July 31, 1994 and 1995, $206,000 and $376,000,
respectively, was paid to the Lenders as interest and fees under the two
facilities.
In fiscal 1994 and 1995, the Company performed certain data acquisition,
processing, marketing and training services for various co-venturers and
recorded sales in the amount of $1,279,000 and $1,633,000, respectively. At July
31, 1995, there was approximately $300,000, in outstanding receivables related
to these transactions.
The Company sold certain assets during July 1994 to Caspian Geophysical, a
joint venture in which the Company had an indirect 10% interest, for a note
receivable payable in 36 monthly installments of $41,667 with an imputed
interest rate of 10%. The net gain recorded after eliminating intercompany
profits was $148,000. The note receivable was repaid in June 1995 as a result of
the sale of the Company's interest in the joint venture. See Note 4.
The Company is party to transactions with P.T. Digicon Mega Pratama ("P.T.
Digicon"), an 80% owned joint venture (see Note 3) in the normal course of
business. During the years ended July 31, 1994, 1995 and 1996 the Company
charged P.T. Digicon $1,069,000, $607,000 and $1,207,000 relating to allocations
of corporate administrative expenses and actual expenses incurred by P.T.
Digicon for salary cost, insurance and equipment charges. Advances from the
Company to P.T. Digicon of $12,439,000 and $14,532,000 at July 31, 1995 and
1996, respectively, have no formal repayment terms and do not bear interest.
F-30
<PAGE> 94
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
19. SELECTED UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
The Company's quarterly supplemental consolidated financial statements for
the years ended July 31, 1995 and 1996 have been restated to account for a
pooling of interests between Digicon Inc. and Veritas Energy Services Inc. (See
Note 2). In addition, the Company's quarterly supplemental consolidated
financial statements for the year ended July 31, 1996 have been restated to
account for the Company's investment in an 80% owned joint venture on the equity
method of accounting rather than on consolidation accounting (See Note 3).
FOR THE YEARS ENDED JULY 31, 1995 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1995
---------------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------- --------------------- --------------------- ---------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 31,811 $54,558 $ 29,993 $51,482 $ 34,197 $ 52,314 $ 35,126 $57,276
Operating expenses:
Cost of services............ 24,109 41,441 22,225 38,718 27,320 44,008 29,163 46,257
Depreciation and
amortization................ 3,285 5,670 3,346 5,891 3,361 5,994 3,341 6,177
Selling, general and
administrative.............. 1,106 1,520 1,058 1,504 1,244 1,482 1,020 1,349
Gain on sale of investment in
FSU joint ventures.......... (4,370) (4,370)
Income (loss) before provision
for income taxes and equity
in (earnings) loss of 50% or
less-owned companies and
joint ventures.............. 2,557 5,176 1,825 3,899 1,054 (301) 3,939 5,813
Net income (loss)............. 607 2,023 829 2,047 479 (276) 863 1,800
Net income (loss) per share of
common stock................ .06 .11 .07 .11 .04 (.02) .08 .10
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31, 1996
--------------------------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------------- --------------------- --------------------- --------------------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 38,178 $59,824 $ 40,068 $62,719 $ 36,279 $ 59,140 $ 68,913
Operating expenses:
Cost of services........... 30,433 46,806 33,247 53,297 27,837 45,001 53,607
Write-off/write-down for
impairment of assets....... 3,628
Depreciation and
amortization............... 3,623 6,352 3,899 6,695 4,015 6,953 6,921
Selling, general and
administrative............. 1,251 1,580 1,276 1,824 1,431 1,854 1,997
Merger related costs......... 3,666
Income (loss) before
provision for income taxes
and equity in (earnings)
loss of 50% or less-owned
companies and joint
ventures................... 1,478 3,683 351 (412 ) 2,041 4,005 (2,873)
Net income (loss)............ 752 1,690 1,077 1,269 1,864 2,823 (4,501)
Net income (loss) per share
of common stock............ .07 .10 .10 .07 .17 .16 (.25)
</TABLE>
- ------------
* Reported quarterly earnings (loss) per share is based on each quarter's
weighted average shares outstanding. The quarters may not total to the
reported annual earnings per share due in part to fluctuations in common
shares outstanding. Weighted average shares for all periods presented have
been restated for the Reverse Split consummated on January 17, 1995. See Note
12.
F-31
<PAGE> 95
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY SENIOR NOTES IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 5
Risk Factors........................... 12
The Company............................ 16
Use of Proceeds........................ 16
Capitalization......................... 17
Selected Supplemental Consolidated
Financial Data....................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business............................... 24
Management............................. 33
Description of Senior Notes............ 35
Underwriting........................... 62
Legal Matters.......................... 63
Experts................................ 63
Index to Supplemental Consolidated
Financial Statements................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VERITAS LOGO]
VERITAS DGC INC.
------------------------
$75,000,000
% SENIOR NOTES DUE 2003
--------------------
PROSPECTUS
--------------------
DILLON, READ & CO. INC.
SALOMON BROTHERS INC
RAUSCHER PIERCE REFSNES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS.
The following is a list of all the exhibits filed as part of this amendment
to the Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ----------------------------------------------------------------------
<S> <C>
12 Computation of earnings to fixed charges ratio.
23-A Consent of Deloitte & Touche LLP.
23-B Consent of Price Waterhouse, Chartered Accountants.
</TABLE>
II-1
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on October 17, 1996.
VERITAS DGC INC.
By: /s/ RENE M.J. VANDENBRAND
----------------------------------------
Rene M.J. VandenBrand, Vice President --
Business Development
and Corporate Secretary
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the indicated
capacities and on the 17th day of October, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DAVID B. ROBSON* Director, Chairman of the
- --------------------------------------------- Board and Chief Executive
David B. Robson Officer
/s/ RICHARD W. McNAIRY* Executive Vice President and
- --------------------------------------------- Chief Accounting and
Richard W. McNairy Financial Officer
/s/ GEORGE F. BAKER* Director
- ---------------------------------------------
George F. Baker
/s/ CLAYTON P. CORMIER* Director
- ---------------------------------------------
Clayton P. Cormier
Director
- ---------------------------------------------
Ralph M. Eeson
/s/ LAWRENCE C. FICHTNER* Director
- ---------------------------------------------
Lawrence C. Fichtner
Director
- ---------------------------------------------
Steven J. Gilbert
/s/ STEPHEN J. LUDLOW* Director
- ---------------------------------------------
Stephen J. Ludlow
/s/ BRIAN F. MacNEILL* Director
- ---------------------------------------------
Brian F. MacNeill
/s/ DOUGLAS B. THOMPSON* Director
- ---------------------------------------------
Douglas B. Thompson
/s/ JACK C. THREET* Director
- ---------------------------------------------
Jack C. Threet
*By: /s/ RENE M.J. VANDENBRAND
- ---------------------------------------------
Rene M.J. VandenBrand
(as Attorney-in-Fact)
</TABLE>
II-2
<PAGE> 98
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ----------------------------------------------------------------------
<S> <C>
12 Computation of earnings to fixed charges ratio.
23-A Consent of Deloitte & Touche LLP.
23-B Consent of Price Waterhouse, Chartered Accountants.
</TABLE>
<PAGE> 1
EXHIBIT 12
VERITAS DGC INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO
(IN 000'S OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Earnings:
Income before provision for income taxes
and equity in loss of 50% or less-owned
companies and joint ventures............ $ 7,025 $ 5,961 $ 540 $ 14,587 $ 4,403
Equity in loss of 50% or less-owned
companies and joint ventures............ (1,521) (2,204) (4,965) (5,186) (1,113)
Fixed charges.............................. 9,592 8,100 10,757 14,387 14,869
Capitalized interest....................... (204)
------- ------- ------- ------- -------
Total.............................. $ 15,096 $ 11,653 $ 6,332 $ 23,788 $ 18,159
======= ======= ======= ======= =======
Fixed charges:
Interest expense........................... $ 2,579 $ 1,928 $ 3,213 $ 5,170 $ 5,466
Capitalized interest....................... 204
1/3 Rent expense.......................... 7,013 5,968 7,544 9,217 9,403
------- ------- ------- ------- -------
Total.............................. $ 9,592 $ 8,100 $ 10,757 $ 14,387 $ 14,869
======= ======= ======= ======= =======
Ratio of earnings to fixed charges(2)........ 1.57 1.44 0.59(1) 1.65 1.22
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Earnings are inadequate to cover fixed charges by $4,425,000.
(2) The effect of the refinancing impacts the ratio of earnings to fixed charges
by less than 10%. Therefore, the pro forma ratio is not presented.
<PAGE> 1
EXHIBIT 23-A
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-12481 of Veritas DGC Inc. on Form S-3 of our report dated October 10, 1996,
and to the reference to us under the headings "Selected Financial Data" and
"Experts" appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the incorporation by reference in this Amendment No. 2
to Registration Statement No. 333-12481 of Veritas DGC Inc. on Form S-3 of our
report dated October 10, 1996, appearing in the Annual Report on Form 10-K of
Veritas DGC Inc. for the year ended July 31, 1996.
DELOITTE & TOUCHE LLP
Houston, Texas
October 17, 1996
<PAGE> 1
EXHIBIT 23-B
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
December 11, 1995, which appears on page F-32 of the Definitive Joint Management
Information Circular and Proxy Statement of Digicon Inc. and Veritas Energy
Services Inc. dated July 19, 1996. We also consent to the use in the Prospectus
of our report dated September 20, 1996 relating to the consolidated financial
statements of Veritas Energy Services Inc. which appears in such Prospectus. We
also consent to the references to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE
Chartered Accountants
October 17, 1996
