<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED April 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- ---------------
Commission file number 1-7427
DIGICON INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3701 KIRBY DRIVE, SUITE #112, HOUSTON, TEXAS 77098
(Address of principal executive offices) (Zip Code)
(713) 526-5611
(Registrant's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 12, 1996
Common Stock, $.01 par value 11,177,422
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<PAGE> 2
DIGICON INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
April 30, 1996 and July 31, 1995 1
Consolidated Statements of Operations -
For the Three and Nine Months Ended April 30, 1996 and 1995 3
Consolidated Statements of Cash Flows -
For the Nine Months Ended April 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
PART II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
April 30, July 31,
1996 1995
-------------- -------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,303 $ 4,209
Restricted cash investments 339 670
Accounts and notes receivable (net of allowance for
doubtful accounts: April, $527; July, $703) 37,962 40,662
Materials and supplies inventory (net of reserves:
April, $66; July, $66) 1,466 1,335
Prepayments and other 8,093 6,619
------------ -----------
Total current assets 53,163 53,495
Property and equipment:
Seismic equipment 58,424 53,615
Data processing equipment 23,189 26,703
Leasehold improvements and other 28,081 29,394
------------ -----------
Total 109,694 109,712
Less accumulated depreciation 60,160 60,874
------------ -----------
Property and equipment - net 49,534 48,838
Proprietary seismic data 25,725 28,444
Goodwill (net of accumulated amortization:
April, $1,483; July, $1,168) 2,762 3,077
Other assets 1,212 1,216
------------ -----------
Total $ 132,396 $ 135,070
============ ===========
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
1
<PAGE> 4
<TABLE>
<CAPTION>
(Unaudited)
April 30, July 31,
1996 1995
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands of dollars)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 20,005 $ 10,915
Accounts payable - trade 16,454 18,875
Accrued interest 342 409
Other accrued liabilities 13,526 14,869
Income taxes payable 1,494 1,097
------------- -----------
Total current liabilities 51,821 46,165
Non-current liabilities:
Long-term debt-less current maturities 9,161 25,243
Deferred credits 3,669 3,675
Other non-current liabilities 1,228 1,105
------------- -----------
Total non-current liabilities 14,058 30,023
Stockholders' equity:
Common stock, $.01 par value; authorized:
20,000,000 shares; issued: 11,123,422 shares and
11,134,939 shares at April and July, respectively 111 111
Additional paid-in capital 71,065 71,895
Accumulated deficit from August 1, 1991 (4,659) (8,352)
Less: Treasury stock, at cost; 858,497 shares (4,772)
------------- -----------
Total stockholders' equity 66,517 58,882
------------- -----------
Total $ 132,396 $ 135,070
============= ===========
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 36,279 $ 34,448 $ 114,525 $ 96,714
Costs and expenses:
Operating expenses 27,837 27,767 91,517 75,476
Depreciation and amortization 4,015 3,469 11,537 10,315
Selling, general and administrative 1,431 1,244 3,958 3,408
Interest 1,052 1,343 3,677 3,844
Equity in loss of 50% or less-
owned companies and joint ventures 12 185 17 825
Other - net (97) (69) (34) (143)
---------- --------- ---------- -----------
Total costs and expenses 34,250 33,939 110,672 93,725
---------- --------- ---------- -----------
Income before provision for
income taxes 2,029 509 3,853 2,989
Provision for income taxes 165 30 160 1,074
---------- --------- ---------- -----------
Net income $ 1,864 $ 479 $ 3,693 $ 1,915
========== ========= ========== ===========
Per share of common stock:
Income per share of common stock $ .17 $ .04 $ .34 $ .17
========== ========= ========== ===========
Weighted average shares (includes
common stock only) 11,123 11,135 10,939 11,075
========== ========= ========== ===========
Cash dividends None None None None
========== ========= ========== ===========
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
----------------------------
1996 1995
------------ ------------
(In thousands of dollars)
<S> <C> <C>
Operating activities:
Net income $ 3,693 $ 1,915
Non-cash items included in net income:
Depreciation and amortization 11,537 10,315
Amortization of deferred gain on sale/leaseback (103) (753)
(Gain) loss on disposition of property and equipment 158 (70)
Equity in loss of 50% or less-owned
companies and joint ventures 17 825
Write-down of proprietary seismic data to market 297 297
Restructuring accrual (786)
Amortization of warrants issued with short-term
related party loans 77
Change in operating assets/liabilities:
Accounts and notes receivable 1,834 (5,079)
Accounts and notes receivable from FSU joint venture 59
Materials and supplies inventory (131) 139
Prepayments and other (1,474) (1,979)
Proprietary seismic data 2,422 (7,994)
Other 13 407
Accounts payable - trade (2,653) (2,944)
Accrued interest (67) 270
Other accrued liabilities (1,240) 1,929
Income taxes payable 397 (352)
Deferred credits (6) (415)
Other non-current liabilities 123 52
----------- ---------
Total cash provided (used) in operating activities 14,817 (4,087)
Financing activities:
Borrowings of short-term related party debt 30
Payments of short-term related party debt (1,052)
Payments of long-term debt (8,082) (4,000)
Net borrowings (payments) under credit agreements (4,439) 3,430
Common stock issue costs (30) (72)
Net proceeds from sale of treasury stock 3,972
----------- ---------
Total cash used by financing activities (8,579) (1,664)
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
DIGICON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
-----------------------------
1996 1995
------------ ------------
(In thousands of dollars)
<S> <C> <C>
Investing activities:
Purchase of property and equipment $ (5,952) $ (2,618)
Sale of property and equipment 514 1,207
(Increase) decrease in restricted cash investments 331 (340)
Increase in investment in FSU joint ventures (1,673)
Sale to Syntron, Inc.:
Inventories and technologies 1,630
Property and equipment 1,370
------------- ----------
Total cash used by investing activities (5,107) (424)
Currency (gain) loss on foreign cash (37) 53
------------- ----------
Change in cash and cash equivalents 1,094 (6,122)
Beginning cash and cash equivalents balance 4,209 8,365
------------- ----------
Ending cash and cash equivalents balance $ 5,303 $ 2,243
============= ==========
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
5
<PAGE> 8
DIGICON INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
--------------------------------
1996 1995
------------- ------------
(In thousands of dollars)
<S> <C> <C>
Schedule of non-cash investing and financing activities:
Increase in property and equipment for:
Accounts and notes receivable - deferred credits utilized $ 866
Equipment purchase obligations 5,529 $ 4,894
Accounts payable - trade 232 133
Increase (decrease) in investment in FSU joint venture for:
Common stock 2,309
Accounts and note receivable from FSU joint venture (409)
Long-term debt 245
Sale of inventories, property and equipment, and technologies
to Syntron, Inc. resulting in an increase (decrease) in:
Accounts and notes receivable - deferred credits 3,255
Materials and supplies inventory (2,034)
Other assets - deferred credits receivable 857
Accounts payable - trade 957
Other accrued liabilities - deferred gain 1,011
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)
Warrants issued with short-term related party loans (89)
Supplemental disclosures of cash flow information:
Cash paid for:
Interest-
Revolving credit agreements 1,408 1,449
Secured term loan 363 473
Equipment purchase obligations 1,304 766
Other 620 747
Income taxes 634 1,431
</TABLE>
6
<PAGE> 9
DIGICON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPINION OF MANAGEMENT
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position of Digicon Inc. and subsidiaries at
April 30, 1996, and the results of its operations and its cash flows
for the three and nine months ended April 30, 1996 and 1995. The
results of operations for any interim period are not necessarily
indicative of the results to be expected for a full year, as such
results could be affected by changes in demand for geophysical
services and products, which is directly related to the level of oil
and gas exploration and development activity. Governmental actions,
foreign currency exchange rate fluctuations, seasonal factors, weather
conditions and equipment problems also could impact future operating
results.
EARNINGS PER SHARE
Weighted average shares and earnings per share for all periods
presented have been restated to reflect the effect of a one for three
reverse stock split consummated on January 17, 1995. Primary earnings
per share is computed based on the weighted average number of shares
of common stock plus common stock equivalents. Shares issuable upon
the conversion of stock options and warrants, which are common stock
equivalents, were disregarded since the treasury stock method of
calculation produced no incremental shares or resulted in dilution of
less than 3%.
Fully diluted earnings per share is not presented since common stock
equivalents referenced above had no dilutive effect or resulted in
dilution of less than 3%.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In October 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 consolidated financial
statements.
7
<PAGE> 10
In March 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation." This statement established a fair value method of
accounting for stock-based compensation plans either through
recognition or disclosure. This statement is effective for fiscal
years beginning after December 15, 1995. The Company will be required
to implement this statement for the fiscal year 1997. The Company
intends to adopt this standard by disclosing the pro forma net income
(loss) and net income (loss) per share amounts assuming the fair value
method was adopted on August 1, 1995. The adoption of this statement
will have no material impact on the Company's consolidated financial
statements.
2. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
--------------- ---------------
(In thousands of dollars)
<S> <C> <C>
Revolving credit agreement due April 1997, at prime plus
3% ( 11.25% at April 30, 1996) $ 10,566 $ 14,123
Secured term loan due June 1997, at 10.75% 4,500 4,500
Secured Indonesian Rupiah revolving credit agreement
due September 1995, at 19% 894
Equipment purchase obligations maturing through
February 1999, at an average rate of 11.05%
at April 30, 1996 14,100 16,641
------------- --------------
Total 29,166 36,158
Less current maturities 20,005 10,915
------------- --------------
Due after one year $ 9,161 $ 25,243
============= ==============
</TABLE>
The revolving credit agreement is with a finance company and provides
a revolving credit facility of up to $17,000,000 (increased from
$15,000,000 in April 1995) through April 11, 1997. Advances under the
agreement are limited by a borrowing formula and are collateralized by
a majority of the assets of the Company. The agreement limits, among
other things, the Company's right, without consent of the lender, to
take certain actions including creating indebtedness, prohibits paying
dividends and requires the Company to maintain certain financial
ratios. The agreement also provides for the deposit of collections of
certain of the Company's accounts receivable into cash collateral
accounts and for the repayment of outstanding advances and monthly
interest with such proceeds. Amounts applied against outstanding
advances are available for reborrowing upon presentation of evidence
of adequate borrowing base coverage. At June 10, 1996, approximately
$6,600,000 was available for borrowing under this agreement. The
facility matures on April 11, 1997, and as a result, the outstanding
balance at April 30, 1996 ($10.6 million) is classified as current.
During May 1996 the lender formally offered to ex-
8
<PAGE> 11
tend the facility until approximately June 15, 1998 upon terms which
would result in a reduction of the Company's effective borrowing
costs. The Company is evaluating this offer but no decision has yet
been made with regard to this facility.
The secured term loan is due June 30, 1997, with interest at 10.75%
payable quarterly. A principal payment of $1,500,000 is due June 30,
1996, and the remaining unpaid principal is due June 30, 1997. The
loan agreement limits, but does not prohibit, the Company's ability to
pay dividends and to incur indebtedness for borrowed money and
requires the Company to maintain certain financial ratios. In April
1994, in conjunction with the execution of the revolving credit
agreement, the lender was granted a security interest in a majority of
the Company's equipment. In connection with the loan, the Company
issued common stock purchase warrants to the lender.
The secured Indonesian Rupiah revolving credit facility in the amount
of two billion Rupiahs was the obligation of P.T. Digicon Mega
Pratama, a consolidated subsidiary of the Company, and provided
working capital and certain bank guarantees for its Indonesian
operations. The facility was repaid September 1995.
The Company's equipment purchase obligations represent installment
loans and capitalized lease obligations primarily related to computing
and seismic equipment.
3. SALE OF TREASURY STOCK
In September 1995, the Company sold its 858,497 shares of treasury
stock to a group of institutional investors at a price of $4.6875 per
share for total cash proceeds of $4,024,204.
4. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- -----------------------
1996 1995 1996 1995
--------- ---------- ---------- -----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Net foreign currency exchange
(gain) loss $ (175) $ (31) $ (120) $ 60
Net (gain) loss on disposition of
property and equipment 106 17 158 (70)
Interest income (28) (48) (72) (133)
Other (7)
------ ------ ------ ------
Total $ (97) $ (69) $ (34) $ (143)
====== ====== ====== ======
</TABLE>
9
<PAGE> 12
5. COMMON STOCK AND WARRANTS
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 in 1991 of a previous issue of
common and preferred stock and certain other liabilities.
On March 18, 1996, the board of directors declared a dividend
distribution to common shareholders of record on April 1, 1996, of one
right that entitles a stockholder to purchase a fraction of a share of
a class of preferred stock upon the occurrence of specified events
enumerated by the rights agreement. Such preferred stock, although not
issued at April 30, 1996 could, depending on the terms of such stock,
provide for a liquidation preference over the Company's common stock.
The rights, among other things, will cause substantial dilution to a
person or group that attempts to acquire the Company. The Company has
agreed to give notice of the redemption of the rights prior to
consummation of the transaction described in Note 6 which will result
in termination of the rights agreement.
6. SUBSEQUENT EVENTS
On May 10, 1996 the Company entered into a Combination Agreement (the
"Agreement") with Veritas Energy Services Inc. ("Veritas"), a Canadian
company. The terms of the Agreement provide that Veritas will be
combined with and into the Company (the "Combination"). As a result
of the Combination, each share of Veritas no par value common shares
outstanding will be converted into the right to receive Veritas no par
value exchangeable stock (the "Exchangeable Stock") at an exchange
ratio of 0.8 of a share of Exchangeable Stock per Veritas common
share. All of the holders of Veritas common shares, except for those
stockholders (required to be 5% or less of the outstanding Veritas
common shares by the terms of the Agreement) who perfect and properly
exercise their right to dissent from the Combination and receive fair
value of their shares in cash, will become holders of Exchangeable
Stock. It is estimated that a minimum of approximately 7 million
shares of Exchangeable Stock will be issued. The aggregate stated
capital of the Exchangeable Stock will be equal to the aggregate
stated capital of the Veritas common shares immediately prior to the
Combination that are exchanged or approximately $29.5 million. The
Exchangeable Stock will be 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 will have rights identical to
the holders of the Company's common stock. Options to purchase shares
of Veritas Common Stock ("Veritas Option") will be 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
Veritas Option. The Veritas articles of amalgamation will be amended
to reduce the number of authorized Veritas common shares to one which
will be held by the Company. Consummation of the proposed Combination
awaits approval of the Company's and Veritas' shareholders and United
States ("U.S.") and Canadian regulatory authorities.
10
<PAGE> 13
The Combination is to be accounted for as a pooling of interests, and
accordingly, the financial position and results of operations of the
Company and Veritas will be combined in fiscal 1996 retroactive to
August 1, 1995 and Veritas' fiscal year will be conformed to the
Company's fiscal year. In addition, all prior periods presented will
be restated to give effect to the Combination. Accordingly, Veritas'
operating results for the period August 1, 1995 to October 31, 1995
will be included in the Company's fiscal 1995 and 1996 financial
statements and will be reflected as an adjustment to the combined
Company's retained earnings on August 1, 1995.
Presented below is pro forma statement of operations information
assuming the Combination had occurred on August 1, 1993. Amounts
related to Veritas have been converted into the Company's reporting
currency, U.S. dollars, using weighted average exchange rates and
have been adjusted for differences between U.S. and Canadian generally
accepted accounting principles ("GAAP"). 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 ($220,000), $253,000 and
($25,000) for the years ended July 31, 1993, 1994 and 1995,
respectively and (ii) reverse the effect of prior period adjustments
affecting net income by approximately ($834,000) and $314,000 for the
years ended July 31, 1994 and 1995, respectively. All amounts are
presented in thousands except per share amounts.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended July 31, April 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 156,876 $ 180,835 $ 217,072 $ 157,687 $ 183,994
========= ========= ========= ========= =========
Net income (loss) $ 574 $ (10,354) $ 5,594 $ 5,358 $ 5,782
========= ========= ========= ========= =========
Earnings (loss) per share $ .05 $ (.66) $ .31 $ .30 $ .33
========= ========= ========= ========= =========
</TABLE>
There are no anticipated changes in accounting methods for either the
Company or Veritas as a result of the combination whose effects should
be considered in the supplemental information presented above.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Digicon's internal sources of liquidity are cash balances ($5.3 million at
April 30, 1996) and cash flow from operations ($14.8 million for the nine
months ended April 30, 1996). External sources include the unutilized portion
of the working capital facility described below (approximately $6.6 million at
June 10, 1996), equipment financing and trade credit. To provide additional
working capital, Digicon maintains a $17.0 million revolving credit facility
with a commercial finance company which provides for borrowings of up to 80% of
the majority of Digicon's domestic and foreign receivables at an interest rate
of 3% over the prime rate, secured by most of Digicon's world-wide assets. In
connection with such facility, Digicon is limited, without the consent of the
lender, in taking certain actions, including creating indebtedness, is
prohibited from paying dividends and is required, among other provisions, to
maintain certain financial ratios. The facility matures on April 11, 1997, and
as a result, the outstanding balance at April 30, 1996 ($10.6 million) is
classified as current. The lender has formally offered to extend the facility
until approximately June 15, 1998 upon terms which would result in a reduction
in Digicon's effective borrowing costs. Digicon is evaluating the offer but no
decision has yet been made with regard to the facility.
At April 30, 1996, Digicon's backlog of commitments for services totaled $107.4
million of which 32% relates to land acquisition, 44% relates to marine
acquisition and 24% relates to data processing. Digicon expects to complete
100% of these commitments during the next twelve months.
Digicon requires significant amounts of working capital to support its
operations and to fund its capital spending and research and development
programs. Digicon's foreign operations, which accounted for 54% of fiscal 1995
revenues and 59% of revenues for the nine months ended April 30, 1996, require
greater amounts of working capital than similar domestic activities, as the
average collection period for foreign receivables is generally longer than for
comparable domestic accounts. In addition, Digicon has increased its
participation in non-exclusive data surveys and has significantly expanded its
library of proprietary data. Because of the lead time between survey execution
and sale, non-exclusive surveys generally require greater amounts of working
capital than contract work. During the first half of the past two fiscal years,
this problem 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 data and the
collection of the proceeds from such sales, Digicon's liquidity will continue
to be affected; however, Digicon believes that these non-exclusive surveys have
good long-term sales, earnings and cash flow potential.
12
<PAGE> 15
In recent years, Digicon has updated and increased its data processing
capabilities, invested significant capital to outfit a new seismic vessel and
has, more recently, allocated significant resources to its land and transition
zone activities. In the past 3 1/2 years, Digicon has committed approximately
$82.5 million for new capital equipment and invested approximately $13.8
million in its research and development efforts. During fiscal 1996, Digicon
expects to spend approximately $20 million for capital expenditures and $2.7
million for research and development activities. In addition, $6.2 million of
equipment was purchased by a commercial finance company and leased to Digicon
under an operating lease entered into in December 1995. The majority of capital
spending in 1996 will be to upgrade and expand Digicon's land and marine data
acquisition capabilities.
The utilization of net operating loss carryforwards ("NOLs") 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.
Digicon believes that it possesses sufficient liquidity to continue operations
on a satisfactory basis. If additional working capital were to become necessary
as a result of deterioration in demand for or pricing of Digicon's services,
and if additional financing were not available, Digicon's operating results and
financial condition could be adversely affected.
On May 10, 1996, the Company entered into a combination agreement with Veritas
Energy Services, Inc., a Canadian company, that provides for Veritas to be
combined with and into the Company. The combination will be accounted for as a
pooling of interests. See Note 6 to Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Three Months Ended April 30, 1996 compared with Three Months Ended April 30,
1995
Revenues. Revenues for the current quarter increased $1.8 million or 5% over
the prior year quarter. Land revenues increased 14% from $10.0 million to $11.4
million primarily as a result of performing higher revenue producing 3D surveys
in the current year compared to 2D surveys in the prior year in North America.
These increases were partially offset by lower revenues for a North American
crew that was being converted to an Input/Output System Two-RSR system and the
decreased utilization of the South American land crews that performed a single
large contract during the third quarter of the prior year but operated on
numerous smaller contracts during the current year. Marine revenues increased
significantly from $6.6 million to $12.2 million, as the Company added a new
vessel to the Gulf of Mexico region. In addition, utilization increased since
in the prior year, several Gulf of Mexico vessels were shooting infill and
undershooting obstructions. Also during the current year, each of the Company's
vessels generally were acquiring more contract data and performing higher
funded multi-client surveys than in the prior year. These revenues were
partially offset while two vessels were in dry-dock for equipment up-
13
<PAGE> 16
grades and biennial maintenance and inspection and due to depressed prices in
the Far East. Processing revenues were comparable to prior year's revenues.
Revenues from increased capacity in Singapore, increased activity levels in the
Far East and a new contract at the Assen, Holland center were offset by a
reduction in revenues from centers closed in Malaysia, Colombia and Oklahoma
City and continued depressed prices in Europe. Revenues in the U.S. were down
since most processing in the current quarter was dedicated to partially funded
multi-client surveys. Sales from proprietary data of $3.4 million were lower
than prior year's revenues of $8.4 million. Significant sales for the current
year occurred in the second quarter.
Operating Expenses. Cost of services were comparable for both periods but, as a
percentage of total revenues, cost of services decreased from 81% to 77%. The
decrease as a percentage of total revenues resulted mainly from higher margins
on 3D land acquisition surveys and higher margins on data processing services
as a result of increased capacity in Singapore and Houston and an improvement
in the Far East market.
Depreciation and Amortization. Depreciation and amortization expense increased
16% from $3.5 million to $4.0 million, due to equipment purchases for South
American land crews, three of the Company's vessels and the Houston, Singapore
and London data processing centers.
Selling, General and Administrative. Selling, general and administrative
expenses increased 15% from $1.2 million to $1.4 million, resulting primarily
from additional costs incurred in implementing a new administrative data
processing system.
Interest. Interest expense decreased 22% from $1.3 million to $1.1 million
primarily from reduced borrowings under Digicon's revolving credit agreement.
Equity in Loss. The joint ventures in the former Soviet Union (the "FSU") were
sold in June 1995, therefore equity losses declined from $185,000 to $12,000.
Other. Other income increased from $69,000 to $97,000 resulting primarily from
increased net foreign currency exchange gains partially offset by increases in
net losses on disposition of property and equipment.
Income Taxes. Provision for income taxes increased from $30,000 to $165,000
primarily due to an increase in taxable income in South America.
14
<PAGE> 17
Nine Months Ended April 30, 1996 compared with Nine Months Ended April 30,
1995
Revenues. For the nine month period ended April 30, 1996, total revenues
increased 18% from $96.7 million to $114.5 million. Land revenues increased 14%
from $28.5 million to $32.5 million, as revenues from North American and
Argentine operations improved as a result of increases in both operating rates
and production on 3D and transition zone surveys. Current period revenues were
reduced by downtime associated with the conversion of a domestic crew to an
Input/Output System Two - RSR system, and permitting delays for another crew.
Marine revenues increased 34% from $24.9 million to $33.5 million, primarily
resulting from the addition of a new vessel, the reassignment of two vessels to
contract work and higher funding levels on proprietary surveys. This increase
was partially offset by lower prices in the Far East. Data processing revenues
increased 4% from $26.9 million to $28.0 million, due to improved contract
terms at the Assen, Holland center, increased capacity at the Houston and
Singapore centers and the improved Australian market. These increases were
partially offset by the closing of Digicon's Bogota, Colombia and Oklahoma City
centers and depressed European data processing prices. Proprietary seismic data
revenues increased 29% from $16.0 million to $20.5 million, resulting from an
expansion of Digicon's library. This expansion has been in response to
modifications in oil and gas companies' spending strategies.
Operating Expenses. Cost of services for the period increased 21% from $75.5
million to $91.5 million, and, as a percentage of total revenues, cost of
services increased from 78% to 80%. The increase as a percentage of total
revenues resulted from a weakness in marine acquisition margins primarily in
the Far East, lower profitability on the mix of proprietary data sales and
$929,000 in Argentina social security taxes retroactively applied to
compensation of employees converted from a temporary to permanent employment
classification.
Depreciation and Amortization. Depreciation and amortization expense increased
12% from $10.3 million to $11.5 million, due to equipment purchases for South
American land crews, three of Digicon's vessels and the Houston, Singapore and
London data processing centers.
Selling, General and Administrative. Selling, general and administrative
expenses increased 16% from $3.4 million to $4.0 million, resulting primarily
from additional costs incurred in implementing a new administrative data
processing system.
Interest. Interest expense decreased 4% from $3.8 million to $3.7 million,
resulting primarily from reduced borrowings under Digicon's revolving credit
agreement.
Equity in Loss. The FSU joint ventures were sold in June 1995, therefore equity
losses declined from $825,000 to $17,000.
Other. Other income decreased from $143,000 to $34,000. The current period
includes losses on damaged cables offset by net foreign currency gains and the
prior period includes a gain on the sale of a seismic vessel partially offset
by losses on damaged cables and net foreign currency losses.
15
<PAGE> 18
Income Taxes. Provisions for income taxes decreased from $1.1 million to
$160,000. In the current period, provision for income taxes from taxable income
primarily in Malaysia was largely offset by an $876,000 tax benefit resulting
from taxable losses in South America generated by deduction for the Argentina
social security taxes and compensation previously discussed. Provision for
income taxes in the prior period related primarily to taxable income in
Malaysia and South America and a tax assessment in Jakarta.
16
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 12, 1996, the Company was not a party to, nor was its property the
subject of, any material pending legal proceedings, as defined by relevant
rules and regulations of the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed with this report:
11) Computation of income per common and common equivalent share
for the three and nine months ended April 30, 1996 and 1995.
b) Reports on Form 8-K
1) A Form 8-K dated March 18, 1996 reported the declaration of a
dividend distribution of one right for each outstanding share
of common stock of the Company to shareholders of record at
the close of business on April 1, 1996. Each right entitles
the registered holder to purchase from the Company a fraction
of a share of Preferred Stock - Junior Participating Series A,
par value $.0l per share upon the occurrence of specified
events enumerated by a Rights Agreement.
2) A Form 8-K dated May 10, 1996 reported the signing of a
Combination Agreement related to the proposed merger of
Digicon Inc. and Veritas Energy Services Inc.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGICON INC.
-------------------------------------------
(Registrant)
Date: June 13, 1996 By: Stephen J. Ludlow
----------------------------------------
Stephen J. Ludlow
(President and Chief Executive Officer)
Date: June 13, 1996 By: Richard W. McNairy
----------------------------------------
Richard W. McNairy
(Principal Financial Officer)
18
<PAGE> 21
EXHIBIT INDEX
11) Computation of income per common and common equivalent share
for the three and nine months ended April 30, 1996 and 1995.
27) Financial Data Schedule
<PAGE> 1
EXHIBIT 11
COMPUTATION OF INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 11,123 11,135 10,939 11,075
======= ======= ======= ========
Primary income per share $ .17 $ .04 $ .34 $ .17
======= ======= ======= ========
FULLY DILUTED INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 11,123 11,135 10,939 11,075
Shares issuable from assumed conversion of:
Warrants 154 154
Stock options 81 80
------- ------- ------- --------
Weighted average shares of common
stock outstanding, as adjusted 11,358 11,135 11,173 11,075
======= ======= ======= ========
Fully diluted income per share $ .16 (3) $ .04 (2) $ .33 (3) $ .17 (2)
======= ======= ======= ========
NET INCOME FOR PRIMARY AND
FULLY DILUTED COMPUTATION:
Net income $ 1,864 $ 479 $ 3,693 $ 1,915
======= ======= ======= ========
</TABLE>
- --------------------
(1) Weighted average shares of common stock outstanding for all periods
have been restated for a one for three reverse stock split consummated
on January 17, 1995.
(2) This calculation is submitted in accordance with Item 601(b)11 of
Regulation S-K although warrants and stock options had no dilutive
effect.
(3) This calculation is submitted in accordance with Item 601(b)11 of
Regulation S-K although not required by footnote 2 to paragraph 14 of
APB Opinion No. 15 because warrants and options result in dilution of
less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DIGICON
INC'S FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 5,642
<SECURITIES> 0
<RECEIVABLES> 37,962
<ALLOWANCES> 527
<INVENTORY> 1,466
<CURRENT-ASSETS> 53,163
<PP&E> 109,694
<DEPRECIATION> 60,160
<TOTAL-ASSETS> 132,396
<CURRENT-LIABILITIES> 51,821
<BONDS> 9,161
<COMMON> 111
0
0
<OTHER-SE> 66,406
<TOTAL-LIABILITY-AND-EQUITY> 132,396
<SALES> 0
<TOTAL-REVENUES> 114,525
<CGS> 0
<TOTAL-COSTS> 110,672
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,677
<INCOME-PRETAX> 3,853
<INCOME-TAX> 160
<INCOME-CONTINUING> 3,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,693
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
