<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- -----------
Commission file number 1-7427
Veritas DGC Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3701 KIRBY DRIVE, SUITE #112, HOUSTON, TEXAS 77098
(Address of principal executive offices) (Zip Code)
(713) 512-8300
(Registrant's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The number of shares of the Company's common stock (the "Common Stock"),
$.01 par value, outstanding at February 28, 1997 was 18,790,907 (including
2,406,583 Veritas Energy Services Inc. exchangeable shares which are identical
to the Common Stock in all material respects.)
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<PAGE> 2
VERITAS DGC INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
July 31, 1996 and January 31, 1997 1
Consolidated Statements of Operations -
For the Three and Six Months Ended January 31, 1996 and 1997 3
Consolidated Statements of Cash Flows -
For the Six Months Ended January 31, 1996 and 1997 4
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
PART II. Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
<TABLE>
<CAPTION>
(Unaudited)
July 31, January 31,
1996 1997
---------- ----------
<S> <C> <C>
ASSETS (AS COMBINED - SEE NOTE 2)
Current assets:
Cash and short-term investments $ 10,072 $ 15,523
Restricted cash investments 327 537
Accounts and notes receivable (net of allowance for
doubtful accounts: July, $740; January, $505) 65,447 105,140
Materials and supplies inventory 1,659 2,126
Prepayments and other 8,199 6,532
---------- ----------
Total current assets 85,704 129,858
Property and equipment 165,104 197,682
Less accumulated depreciation 86,094 102,668
---------- ----------
Property and equipment - net 79,010 95,014
Multi-client data library 25,628 27,139
Investments in and advances to joint venture 1,463 1,379
Goodwill (net of accumulated amortization:
July, $2,214; January, $2,475) 3,674 3,413
Other assets 3,113 3,655
---------- ----------
Total $ 198,592 $ 260,458
========== ==========
</TABLE>
- -----------------
See Notes to Consolidated Financial Statements.
1
<PAGE> 4
<TABLE>
<CAPTION>
(Unaudited)
July 31, January 31,
1996 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (AS COMBINED - SEE NOTE 2)
Current liabilities:
Current maturities of long-term debt $ 13,739 $ 480
Accounts payable - trade 27,454 28,487
Accrued interest 313 2,189
Other accrued liabilities 19,905 27,769
Income taxes payable 1,814 3,133
---------- ----------
Total current liabilities 63,225 62,058
Non-current liabilities:
Long-term debt - less current maturities 27,351 75,186
Other non-current liabilities 2,093 2,129
---------- ----------
Total non-current liabilities 29,444 77,315
Stockholders' equity:
Common stock, $.01 par value; authorized:
40,000,000 shares; issued: 11,334,352 shares and
16,148,926 shares at July and January, respectively 113 161
Additional paid-in capital 104,469 107,635
Retained earnings (from August 1, 1991
with respect to Digicon Inc.) 2,275 13,950
Cumulative foreign currency translation adjustment
(934) (661)
---------- ----------
Total stockholders' equity 105,923 121,085
---------- ----------
Total $ 198,592 $ 260,458
========== ==========
</TABLE>
- ---------------------
See Notes to Consolidated Financial Statements.
2
<PAGE> 5
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(AS COMBINED - SEE NOTE 2)
<S> <C> <C> <C> <C>
Revenues $ 62,719 $ 90,691 $ 122,543 $ 167,096
Costs and expenses:
Operating expenses 53,297 67,982 100,103 126,302
Depreciation and amortization 6,695 9,828 13,047 18,520
Selling, general and administrative 1,824 2,432 3,404 4,382
Other (income) expense:
Merger related costs 597
Interest 1,387 1,967 2,674 3,230
Other (72) 532 44 276
----------- ----------- ----------- -----------
Total costs and expenses 63,131 82,741 119,272 153,307
----------- ----------- ----------- -----------
Income (loss) before provision for
(benefit from) income taxes and equity
in earnings of 50% or less-owned
companies and joint ventures (412) 7,950 3,271 13,789
Provision for (benefit from) income taxes (536) 1,681 1,128 2,919
Equity in earnings of 50% or less-
owned companies and joint ventures (1,145) (238) (816) (805)
----------- ----------- ----------- -----------
Net income $ 1,269 $ 6,507 $ 2,959 $ 11,675
=========== =========== =========== ===========
Per share of common stock:
Income per share of common stock $ .07 $ .35 $ .17 $ .63
=========== =========== =========== ===========
Weighted average shares 17,938 18,639 17,663 18,510
=========== =========== =========== ===========
Cash dividends None None None None
=========== =========== =========== ===========
</TABLE>
- -----------------
See Notes to Consolidated Financial Statements.
3
<PAGE> 6
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
----------------------------
1996 1997
------------ ------------
(AS COMBINED - SEE NOTE 2)
<S> <C> <C>
Operating activities:
Net income $ 2,959 $ 11,675
Non-cash items included in net income:
Depreciation and amortization 13,047 18,520
Amortization of deferred gain on sale/leaseback (90)
Loss on disposition of property and equipment 360 439
Equity in earnings of 50% or less-owned
companies and joint ventures (816) (805)
Write-down of multi-client data library to market 198 767
Change in operating assets/liabilities:
Accounts and notes receivable (4,473) (39,693)
Materials and supplies inventory (1,447) (467)
Prepayments and other 867 1,667
Multi-client data library 3,387 (2,278)
Other (2,698) 2,319
Accounts payable - trade 65 (1,420)
Accrued interest 13 1,876
Other accrued liabilities 2,051 7,773
Income taxes payable (71) 1,319
Other non-current liabilities (651) 36
------------ ------------
Total cash provided by operating activities 12,701 1,728
Financing activities:
Borrowing of senior notes 75,000
Debt issues costs (2,765)
Borrowings of long-term debt 781
Payments of long-term debt (4,618) (29,289)
Net payments under credit agreements (1,096) (11,458)
Payment of secured term loan (6,000)
Net proceeds from sale of common stock 13 3,214
Net proceeds from sale of treasury stock 3,972
------------ ------------
Total cash provided (used) by financing activities (1,729) 29,483
</TABLE>
- --------------------
See Notes to Consolidated Financial Statements.
4
<PAGE> 7
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
------------------------
1996 1997
---------- ----------
(AS COMBINED - SEE NOTE 2)
<S> <C> <C>
Investing activities:
(Increase) decrease in restricted cash investments $ 338 $ (210)
(Increase) decrease in investment in and advances to joint venture (260) 889
Purchase of property and equipment (9,329) (27,406)
Sale of property and equipment 422 699
Other (76)
---------- ----------
Total cash used by investing activities (8,905) (26,028)
Currency (gain) loss on foreign cash (55) 268
---------- ----------
Change in cash and cash equivalents 2,012 5,451
Beginning cash and cash equivalents balance 6,691 10,072
---------- ----------
Ending cash and cash equivalents balance $ 8,703 $ 15,523
========== ==========
</TABLE>
- -------------
See Notes to Consolidated Financial Statements.
5
<PAGE> 8
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-----------------------
1996 1997
---------- ----------
(AS COMBINED - SEE NOTE 2)
<S> <C> <C>
Schedule of non-cash investing and financing activities:
Increase in property and equipment for:
Equipment purchase obligations $ 2,788 $ 5,542
Accounts payable - trade 2,040 2,453
Supplemental disclosures of cash flow information:
Cash paid for:
Interest -
Revolving credit agreements 1,036 205
Secured term loans 242 274
Equipment purchase obligations 977 748
Other 443 150
Income taxes 2,509 1,333
</TABLE>
6
<PAGE> 9
VERITAS DGC 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 of a normal and recurring
nature necessary to present fairly the financial position of Veritas
DGC Inc. and subsidiaries ("the Company") at January 31, 1997, and the
results of its operations and its cash flows for the three and six
months ended January 31, 1996 and 1997. 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 shares issuable
upon exchange of Veritas Energy Services Inc. ("VES") Exchangeable
Shares (See Note 2).
Earnings per share are computed based on the weighted average number
of shares of common stock. Shares issuable upon the conversion of
stock options and warrants, which are common stock equivalents, were
disregarded since the treasury stock method of calculation resulted in
dilution of less than 3%.
TRANSLATION OF FOREIGN CURRENCIES
The Company has determined that the United States ("U.S.") dollar is
its primary functional currency and, accordingly, translates 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
period end rates. Operating results (other than depreciation) are
translated at the average rates of exchange prevailing during the
period and remeasurement gains and losses are included in the
determination of net income and reflected in other (income) expense
(See Note 5). Prior to the Combination (See Note 2), VES used the
Canadian dollar as its functional currency and translated all assets
and liabilities at period end exchange rates and operating results at
average exchange rates prevailing during the period. Adjustments
resulting from the translation of assets and liabilities are recorded
in the cumulative foreign currency translation adjustment account in
the stockholders' equity section.
7
<PAGE> 10
NEW ACCOUNTING PRONOUNCEMENTS
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 implemented this statement at the beginning of the
fiscal year 1997. Implementation of this pronouncement did not have a
material effect on the Company's 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 of this statement
will have no material impact on the Company's consolidated financial
statements.
2. BUSINESS COMBINATION
Veritas DGC Inc. was formerly named Digicon Inc. ("Digicon"). On
August 30, 1996, Digicon and Veritas Energy Services Inc. ("VES"), 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 a VES no
par value exchangeable share (the "Exchangeable Shares") at an
exchange ratio of 0.8 of an Exchangeable Share 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 Shares and, accordingly, 7,023,701 shares of
Exchangeable Shares were issued. The aggregate stated capital of the
Exchangeable Shares 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 Shares
are convertible, at the discretion of the stockholder, on a
one-for-one basis into shares of the Company's $0.01 par value
8
<PAGE> 11
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. The VES articles of
amalgamation were amended to reduce the number of authorized VES
common shares to one which is held by the Company
The Combination has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements of Digicon and VES
have been combined and all prior periods have been restated to give
effect to the Combination. 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 will be combined. The Company's results of
operations for the years ended July 31, 1995 and prior will be
combined with VES' results of operations for the years ended October
31, 1995 and prior. To conform year ends, Digicon's results of
operations for the year ended July 31, 1996 will be 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 will be 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 will be included in
the consolidated statements of changes in stockholders' equity. VES'
revenues, net income and net income per share were $22,150,000,
$938,000 and $0.05, respectively, for the period August 1, 1995
through October 31, 1995.
9
<PAGE> 12
Presented below is the effect of the pooling of interests on the
Company's reported results of operations. Amounts related to VES have
been converted into the Company's reporting currency, U.S. dollars,
using weighted average exchange rates prevailing during the period and
reflect adjustments for differences between U.S. and Canadian
generally accepted accounting principles ("GAAP") and
reclassifications to conform financial statement presentation.
Canadian to U.S. GAAP adjustments include adjustments to (i) write off
foreign exchange gains on borrowings which are deferred and
amortized over the period of the debt affecting net income by
approximately $17,000 and $107,000 for the three and six months
ended January 31, 1996, respectively, and (ii) reverse the effect of a
prior period adjustment reducing net income by approximately $90,000
for the six months ended January 31, 1996. Reclassification of
$10,844,000 and $17,829,000 for the three and six months ended January
31, 1996, respectively, have been made to net amounts billed to
customers for reimbursable costs against VES' revenues.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
January 31, January 31,
1996 1996
----------- -----------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Digicon $ 38,755 $ 76,429
VES 34,808 63,943
Reclassifications (10,844) (17,829)
----------- -----------
Total $ 62,719 $ 122,543
=========== ===========
Net income:
Digicon $ 1,077 $ 1,829
VES 209 1,147
Adjustments (17) (17)
----------- -----------
Total $ 1,269 $ 2,959
=========== ===========
Net income per share:
As previously reported $ .10 $ .17
=========== ===========
As restated $ .07 $ .17
=========== ===========
</TABLE>
There are 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 and the six months ended January
31, 1997, the Company incurred and expensed $3,666,000 and $597,000,
respectively, of costs associated with the merger. These costs consist
primarily of professional fees. Costs for the six months ended January
31, 1997 include $150,000 payable to a stockholder who was the former
Chairman of the Board of Directors for consulting services rendered in
conjunction with the merger.
10
<PAGE> 13
3. INVESTMENT IN INDONESIAN JOINT VENTURE
Summarized financial information for the Company's Indonesian joint
venture which is accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- ---------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues $ 1,313 $ 940 $ 1,817 $ 4,236
Operating expenses 69 679 789 3,044
Depreciation and amortization 106 102 213 390
Other (12) (4) (6) (3)
--------- --------- --------- ---------
Total 163 777 996 3,431
Income before benefit from
income taxes 1,150 163 821 805
Benefit from income taxes (75)
--------- --------- --------- ---------
Net income $ 1,150 $ 238 $ 821 $ 805
========= ========= ========= =========
</TABLE>
4. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
July 31, January 31,
1996 1997
---------- ----------
(AS COMBINED - SEE NOTE 2)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Senior notes due October 2003, at 9 3/4% $ 75,000
Revolving credit agreement due July 1998, at
LIBOR plus 2% or prime $ 11,458
Secured term loan due July 1999, at prime plus 3/4% 6,000
Secured term loan due July 1999, at prime plus 1/2% 1,240
Secured term loan due July 1999, at prime plus 1/2% 2,832
Equipment purchase obligations maturing through July 1999,
at a weighted average rate of 8.6% at January 31, 1997 19,319 666
Mortgage note payable due October 2005, at 10% 241
---------- ----------
Total 41,090 75,666
Less current maturities 13,739 480
---------- ----------
Due after one year $ 27,351 $ 75,186
========== ==========
</TABLE>
11
<PAGE> 14
The senior notes are due in October 2003 with interest payable
semi-annually at 9 3/4%. The senior notes are unsecured and are
effectively subordinated to secured debt of the Company with respect
to the assets securing such debt and to all debt of its subsidiaries
whether secured or unsecured. The indenture relating to the senior
notes contains certain covenants which limit the Company's ability to,
among other things, incur additional debt, pay dividends and complete
mergers, acquisitions and sales of assets. Upon a change in control
of the Company, as defined in the Indenture, the holders of the senior
notes have the right to require the Company to purchase all or a
portion of such holder's senior note at a price equal to 101% of
the aggregate principal amount. The Company has the right to redeem
the senior notes, in whole or in part, on or after October 15, 2000.
Under certain conditions, the Company may redeem up to $20.0 million
in aggregate principal amount of the senior notes prior to October 15,
1999.
The revolving credit agreement due July 1998, as amended, is with a
commercial bank and provides a facility of up to $15.0 million.
Advances are secured by substantially all of the receivables of the
Company, bear interest, at the Company's election, at LIBOR plus two
percent or prime rate and are limited by a borrowing formula.
Covenants in the agreement limit, among other things, the Company's
right, without consent of the lender, to take certain actions,
including creating indebtedness and paying dividends, and limit the
Company's capital expenditures in any fiscal year. In addition, the
agreement requires minimum cash flow coverage and the maintenance of
minimum tangible net worth, limits the ratio of funded debt to total
capitalization, and requires the Company to maintain a minimum current
ratio.
The secured term loan due July 1999 was with a commercial bank, was
due in 36 monthly installments of $166,667 plus interest at prime plus
3/4% and was secured by a majority of the assets of the Company
(except those assets directly or indirectly owned by VES). The secured
term loan was paid with proceeds from the senior notes.
The secured term loans due July 1999 provided for advances for
equipment purchases up to Canadian $4.0 million and Canadian $5.5
million, respectively, and advances were payable in 36 equal monthly
installments. Advances bore interest at the prime rates (as defined)
plus 1/2% and were secured by the equipment purchased. The agreements
required VES to maintain certain financial ratios. Advances under the
secured term loans were paid with proceeds from the senior notes.
The Company's equipment purchase obligations represent installment
loans and capitalized lease obligations primarily related to computer
and seismic equipment. Substantially all the equipment purchase
obligations were paid with proceeds from the senior notes.
The mortgage note was payable in monthly installments of Canadian
$4,800 including interest at 10% and was secured by a building. The
mortgage note was paid with proceeds from the senior notes.
12
<PAGE> 15
5. OTHER (INCOME) EXPENSE
Other (income) expense consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------ ------------------
1996 1997 1996 1997
------- ------- ------- -------
(AS COMBINED - SEE NOTE 2)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net foreign currency exchange loss $ 9 $ 619 $ 29 $ 224
Net loss on disposition of
property and equipment 57 215 360 439
Interest income (122) (283) (295) (378)
Other (16) (19) (50) (9)
------- ------- ------- -------
Total $ (72) $ 532 $ 44 $ 276
======= ======= ======= =======
</TABLE>
6. RELATED PARTY TRANSACTION
On November 30, 1996, the Company entered into agreements to purchase
property and equipment in the amount of approximately $1.5 million
from companies which were partially owned by certain nonexecutive
employees of the Company.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are cash and short-term investments
and cash flow from operations. External sources include the unutilized portion
of a revolving credit facility, equipment financing and trade credit.
In October 1996, the Company effected a public offering of $75.0 million of 9
3/4% senior notes due 2003 (the "Senior Notes") which generated approximately
$72.2 million of net proceeds. The indenture relating to the Senior Notes (the
"Indenture") contains certain covenants, including covenants which limit the
Company's ability to, among other things, incur additional debt, pay dividends
and complete mergers, acquisitions and sales of assets. Upon a change of
control of the Company (as defined in the Indenture), holders of the Senior
Notes have the right to require the Company to purchase all or a portion of
such holder's Senior Note at a price equal to 101% of the aggregate principal
amount. Interest is payable semi-annually beginning April 1997.
The Company maintains a $15.0 million revolving credit facility, as amended
(the "Credit Facility"), with a commercial bank which will mature in July 1998.
Advances under the Credit Facility are secured by substantially all of the
Company's receivables, bear interest, at the Company's election, at LIBOR plus
two percent or prime rate and are 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 Credit Facility limit, among other
things, the Company's right, without consent of the lender, to take certain
actions, including creating indebtedness and paying dividends and limit the
Company's capital expenditures in any fiscal year. In addition, the Credit
Facility requires minimum cash flow coverage and the maintenance of minimum
tangible net worth, limits the ratio of funded debt to total capitalization,
and requires the Company to maintain a minimum current ratio.
The Company requires significant amounts of working capital to support its
operations and to fund capital spending and research and development programs.
The Company's foreign operations require greater amounts of working capital
than similar domestic activities, as the average collection period for foreign
receivables is generally longer than for comparable domestic accounts.
Approximately 57% of revenues for the six months ended January 31, 1997 are
attributable to the Company's export sales and foreign operations. In addition,
the Company has increased its participation in multi-client data surveys and
has significantly expanded its library of multi-client data. Because of the
lead time between survey execution and sale, multi-client data surveys
generally require greater amounts of working capital than contract work.
Depending on timing of future sales of the data and the collection of the
proceeds from such sales, the Company's liquidity will continue to be affected;
however, the Company believes that these non-exclusive surveys have good
long-term sales, earnings and cash flow potential.
Approximately $49.8 million of the net proceeds from the Senior Notes has been
used to retire outstanding indebtedness of the Company (including borrowings
under the Credit Facility). The remaining net proceeds are being used to fund a
portion of the Company's $70.0 million capital expenditure budget for fiscal
1997. It is anticipated that the balance of the 1997 capital
14
<PAGE> 17
expenditure budget will be financed from internally generated funds, and, if
necessary, from the Credit Facility or other borrowings permitted by the
Indenture and Credit Facility. Of the $70.0 million capital expenditure budget,
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 of substantially enhancing operating
efficiency. The remaining $36.1 million will be used for expansion of its
equipment complement to meet increased demand for seismic services.
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 cash and short-term
investments, cash flow generated from operations and borrowings permitted under
the Indenture and Credit Facility will provide sufficient liquidity to fund
these requirements until the Senior Notes become due in 2003. However, the
Company's ability to meet its debt service and other obligations depends on its
future performance, which, in turn, is subject to general economic conditions,
business and other factors beyond the Company's control. If the Company is
unable to generate sufficient cash flow from operations or otherwise to comply
with the terms of the Credit Facility or the Indenture, it may be required to
refinance all or a portion of its existing debt or obtain additional financing.
There can be no assurances that the Company would be able to obtain such
refinancing or financing, or that any refinancing or financing would result in
a level of net proceeds required.
15
<PAGE> 18
RESULTS OF OPERATIONS
Three Months Ended January 31, 1997 compared with Three Months Ended January
31, 1996.
Revenues. Land and transition zone seismic data acquisition revenues in the
second quarter increased $17.6 million or 68% over the same period last year.
Crews operating in the second quarter increased to 17 from 14 and the total
number of channels increased to 21,000 from 17,500 compared with the same
period of the prior year. Strong seasonal market demand for crews in Canada
coupled with larger channel requirements for the U.S. highlands and transition
markets accounted for the higher capacity. The Canadian market is showing
stronger demand for off season work, and other land markets are experiencing
longer term contracts and increased activity. The higher activity levels are
resulting in improved contract prices and weather protection clauses to ensure
crew availability.
Marine acquisition revenues were $1.7 million or 16% higher than the same
quarter of the prior year, primarily due to increased vessel utilization. The
marine vessels Polar Search and Polar Princess which were operating in the
North Sea have been mobilized to the Gulf of Mexico. The Polar Princess
completed a survey in the Falklands en route to the Gulf of Mexico and is
presently in the shipyard being upgraded to 7200 meter Syntron RDA streamer
capability. The Polar Search completed its upgrade to the 7200 meter Syntron
RDA streamers early in the second quarter. The upgrade to more channels coupled
with high production for all vessels worldwide and improving prices in the
contract market are yielding higher margins.
Revenues from the Company's seismic data processing operations increased $3.9
million or 28% over the same period last year due to the installation of new HP
KittyHawk Systems in the major marine data processing centers and the new NEC
Supercomputer in Houston as a result of rising demand. Additionally, land data
processing centers set up in the prior quarter in Oklahoma City and Quito,
Ecuador were in full production. A center in Abu Dhabi was set up late in the
second quarter, and full-time production is expected to be achieved late in the
third quarter. In the coming fiscal third quarter, the long-term contract
operation of a dedicated center will be completed. The personnel from that
center will be re-deployed to the Houston and Crawley, England centers to
process the higher production requirements of those centers.
Multi-client data sales rose by $4.7 million or 41% over the same period last
year. The higher data sales reflect increased activity levels in the North Sea
and Gulf of Mexico markets. Due to increasing customer interest in deep-water
and sub-salt areas of the Gulf of Mexico, demand for larger inventory levels in
these areas is increasing. Surveys in the Shetland-Faroes area, Gulf of Mexico
deep-water basin and smaller selected Far East areas are planned over the
coming months. The Company initiated its first land data library project in the
U.S. and will be expanding projects in this area.
Operating Expenses. Costs of services increased $14.7 million or 28% over the
same period last year but as a percent of revenues decreased from 85% to 75%.
The improvement in operating margins is attributable to all service groups as a
result of increased demand, higher prices, better equipment utilization and
increased capacity as discussed above.
16
<PAGE> 19
Depreciation and Amortization. Depreciation and amortization expense increased
47% from $6.7 million to $9.8 million due to the significant 1997 capital
expenditure program as previously discussed.
Selling, General and Administrative. Selling, general and administrative
expenses increased 33% from $1.8 million to $2.4 million, resulting primarily
from costs incurred in a more aggressive marketing strategy and in implementing
new administrative and accounting data processing systems.
Interest. Interest expense increased $580,000 due to increased debt levels to
finance the Company's 1997 capital expenditure program.
Other. Other (income) expense decreased from income of $72,000 to an expense of
$532,000 resulting primarily from net foreign currency exchange losses.
Income Taxes. Provision for income taxes increased from a $536,000 benefit to a
$1.7 million provision as a result of the increased profitability of the
Company. The effective tax rate was reduced in the current year by
restructuring the operations of certain of the Company's subsidiaries.
Equity in Earnings. Equity in earnings is attributable to the Company's
Indonesian joint venture which performed profitable marine acquisition services
in the prior year.
Six Months Ended January 31, 1997 compared with Six Months Ended January 31,
1996.
Revenues. Land and transition zone seismic data acquisition revenues for the
year increased $26.3 million or 46% over the same period last year due to
strong market demand in Canada and improving prices. During the current year
the Company also added an Input/Output System Two-RSR crew to its transition
zone operations and increased the number of land crews and channels in
operation.
Marine acquisition revenues were $9.2 million or 46% higher than the same
period of the prior year primarily due to increased utilization of the
Company's vessels and the addition of a vessel. In the prior year, vessels
experienced downtime related to vessel upgrades and mobilization and bad
weather. Lower production also resulted from shooting obstructions and program
designs.
The Company's seismic data processing operations increased $5.7 million or 21%
over the same period last year due to increased capacity and increased volumes
of marine data available for processing. The Company has substantially upgraded
its marine data processing centers and added a new NEC supercomputer in
Houston. The Company also added new centers in Quito, Ecuador and Oklahoma City.
Multi-client data sales rose by $3.3 million or 19% over the same period last
year due to increasing customer interest in the North Sea and Gulf of Mexico
multi-client data surveys. In general, demand has increased for multi-client
data surveys.
17
<PAGE> 20
Operating Expenses. Costs of services increased $26.2 million or 26%, but as a
percent of revenues decreased from 82% to 76%. The improvement in operating
margins is attributable to all service groups as a result of increased demand,
higher prices, better equipment utilization and increased capacity as discussed
above.
Depreciation and Amortization. Depreciation and amortization expense increased
42% from $13.0 million to $18.5 million due to the significant 1997 capital
expenditure program.
Selling, General and Administrative. Selling, general and administrative
expenses increased 29% from $3.4 million to $4.4 million, resulting primarily
from costs incurred in a more aggressive marketing strategy and in implementing
new administrative and accounting data processing systems.
Merger Related Costs. Merger related costs are a result of the Combination
discussed in Note 2 of Notes to the Consolidated Financial Statements.
Interest. Interest expense increased $556,000 due to increased debt levels to
finance the Company's 1997 capital expenditure program.
Other. Other expense increased $232,000 primarily due to net foreign currency
exchange losses.
Income Taxes. Provision for income taxes increased from $1.1 million to $2.9
million as a result of increased profitability of the Company. The effective
tax rate was reduced in the current year by restructuring the operations of
certain of the Company's subsidiaries.
18
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to, nor is its property the subject of, any material
pending legal proceedings, as defined by relevant rules and regulations of the
Securities and Exchange Commission.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 16, 1996.
Common stockholders of record on November 1, 1996 were entitled to vote. Each
of the eight directors nominated for the board of directors was elected by the
stockholders as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ------------
<S> <C> <C>
George F. Baker 14,197,948 100
Clayton P. Cormier 14,197,946 0
Ralph M. Eeson 14,197,946 700
Lawrence C. Fichtner 14,197,946 0
Steve J. Gilbert 12,044,174 2,340,290
Stephen J. Ludlow 14,197,746 200
Brian F. MacNeill 14,197,746 450
David B. Robson 14,197,746 200
Douglas B. Thompson 14,197,746 200
Jack C. Threet 14,197,746 1,050
</TABLE>
19
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits filed with this report:
3-A) Restated Certificate of Incorporation of Veritas DGC Inc. dated August 30,
1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated
September 16, 1996 is incorporated herein by reference.)
3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc.
(Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated
November 12, 1991 is incorporated herein by reference.)
3-C) By-laws of New Digicon Inc. dated June 24, 1991 (Exhibit 3-I to Digicon
Inc.'s Form 10-K for the year ended July 31, 1991, is incorporated herein
by reference.)
4-A) Specimen certificate for Senior Notes. (Included as part of Section 2.2 of
Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481
dated September 20, 1996 is incorporated herein by reference.)
4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of
Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as
trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No.
333- 12481 dated September 20, 1996 is incorporated herein by reference.)
4-C) Specimen Veritas DGC Inc. common stock certificate. (Exhibit 4-C to
Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996, is
incorporated herein by reference.)
10-A) Salary Continuation Agreement executed by Nicholas A. C. Bright, Kevin P.
Callaghan, Richard W. McNairy and Allan C. Pogach. (Incorporated herein by
reference to Exhibit 10-E of Digicon Inc.'s Annual Report on Form 10-K for
the year ended July 31, 1994)
10-B) Salary Continuation Agreement executed by Stephen J. Ludlow (Incorporated
herein by reference to Exhibit 10-B of Veritas DGC Inc.'s Amendment No. 1
to Registration Statement No. 333-12481, dated October 2, 1996)
10-C) Asset Purchase Agreement dated August 31, 1994, between Syntron, Inc. and
Digicon Geophysical Corp., Euroseis, Inc., Digicon/GFS Inc. and Digicon
Inc. (Incorporated herein by reference to Exhibit 10-M of Digicon Inc.'s
Annual Report on Form 10-K for the year ended July 31, 1994)
10-D) 1992 Non-Employee Director Stock Option Plan. (Incorporated herein by
reference to Exhibit 10-T of Digicon Inc.'s Amendment No. 3 to
Registration Statement No. 33-54384, dated December 17, 1992)
10-E) Amended and Restated 1992 Employee Nonqualified Stock Option Plan.
(Incorporated herein by reference to Exhibit 10-E of Veritas DGC Inc.'s
Amendment No. 1 to Registration Statement No. 333-12481, dated October 2,
1996)
20
<PAGE> 23
10-F) Support Agreement dated August 30, 1996, between Digicon Inc. and Veritas
Energy Services Inc. (Incorporated herein by reference to Exhibit 10.1 of
Veritas DGC Inc.'s Current Report on Form 8-K, dated August 30, 1996)
10-G) Credit Agreement dated July 18, 1996, among Digicon Inc. and Digicon
Geophysical Corp., Digicon/GFS Inc., Digicon Geophysical Limited and
Digicon Exploration, Ltd., as Borrowers, each of the banks named therein,
and Wells Fargo Bank (Texas), National Association, as issuing bank, as a
bank and as agent for the banks (the "Credit Agreement") (Incorporated
herein by reference to Exhibit 10-G of Veritas DGC Inc.'s Amendment No. 1
to Registration Statement No. 333-12481, dated October 2, 1996)
10-H) Letter dated September 27, 1996, from Wells Fargo Bank (Texas), National
Association, agreeing to amend the Credit Agreement (Incorporated herein
by reference to Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to
Registration Statement No. 333-12481, dated October 2, 1996)
*11) Computation of income per common and common equivalent share for the
three and six months ended January 31, 1996 and 1997.
*27) Financial Data Schedule
*Filed herewith
b) Reports on Form 8-K
1) A Form 8-K dated November 27, 1996, as amended by Form 8-K/A-1 dated
December 4, 1996, reported a change in the Company's principal
accountants.
21
<PAGE> 24
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.
VERITAS DGC INC.
----------------------------------------
(Registrant)
Date: March 17, 1997 By: /s/ David B. Robson
----------------------- ----------------------------------------
David B. Robson
(Chairman of the Board
and Chief Executive Officer)
Date: March 17, 1997 By: /s/ Richard W. McNairy
----------------------- ----------------------------------------
Richard W. McNairy
(Chief Accounting and Financial Officer)
22
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3-A) Restated Certificate of Incorporation of Veritas DGC Inc. dated
August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on
Form 8-K dated September 16, 1996 is incorporated herein by
reference.)
3-B) Certificate of Ownership and Merger of New Digicon Inc. and Digicon
Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No.
33-43873 dated November 12, 1991 is incorporated herein by reference.)
3-C) By-laws of New Digicon Inc. dated June 24, 1991 (Exhibit 3-I to
Digicon Inc.'s Form 10-K for the year ended July 31, 1991, is
incorporated herein by reference.)
4-A) Specimen certificate for Senior Notes. (Included as part of Section 2.2
of Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No.
333-12481 dated September 20, 1996 is incorporated herein by
reference.)
4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003
of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank,
as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement
No. 333-12481 dated September 20, 1996 is incorporated herein by
reference.)
4-C) Specimen Veritas DGC Inc. common stock certificate. (Exhibit 4-C to
Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996, is
incorporated herein by reference.)
10-A) Salary Continuation Agreement executed by Nicholas A. C. Bright, Kevin
P. Callaghan, Richard W. McNairy and Allan C. Pogach. (Incorporated
herein by reference to Exhibit 10-E of Digicon Inc.'s Annual Report on
Form 10-K for the year ended July 31, 1994)
10-B) Salary Continuation Agreement executed by Stephen J. Ludlow
(Incorporated herein by reference to Exhibit 10-B of Veritas DGC Inc.'s
Amendment No. 1 to Registration Statement No. 333-12481, dated October
2, 1996)
10-C) Asset Purchase Agreement dated August 31, 1994, between Syntron, Inc.
and Digicon Geophysical Corp., Euroseis, Inc., Digicon/GFS Inc. and
Digicon Inc. (Incorporated herein by reference to Exhibit 10-M of
Digicon Inc.'s Annual Report on Form 10-K for the year ended July 31,
1994)
10-D) 1992 Non-Employee Director Stock Option Plan. (Incorporated herein by
reference to Exhibit 10-T of Digicon Inc.'s Amendment No. 3 to
Registration Statement No. 33-54384, dated December 17, 1992)
10-E) Amended and Restated 1992 Employee Nonqualified Stock Option Plan.
(Incorporated herein by reference to Exhibit 10-E of Veritas DGC Inc.'s
Amendment No. 1 to Registration Statement No. 333-12481, dated October
2, 1996)
<PAGE> 26
10-F) Support Agreement dated August 30, 1996, between Digicon Inc. and
Veritas Energy Services Inc. (Incorporated herein by reference to
Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K, dated
August 30, 1996)
10-G) Credit Agreement dated July 18, 1996, among Digicon Inc. and Digicon
Geophysical Corp., Digicon/GFS Inc., Digicon Geophysical Limited and
Digicon Exploration, Ltd., as Borrowers, each of the banks named
therein, and Wells Fargo Bank (Texas), National Association, as
issuing bank, as a bank and as agent for the banks (the "Credit
Agreement") (Incorporated herein by reference to Exhibit 10-G of
Veritas DGC Inc.'s Amendment No. 1 to Registration Statement No.
333-12481, dated October 2, 1996)
10-H) Letter dated September 27, 1996, from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement
(Incorporated herein by reference to Exhibit 10-H of Veritas DGC
Inc.'s Amendment No. 1 to Registration Statement No. 333-12481,
dated October 2, 1996)
*11) Computation of income per common and common equivalent share for the
three and six months ended January 31, 1996 and 1997.
*27) Financial Data Schedule
</TABLE>
*Filed herewith
<PAGE> 1
EXHIBIT 11
COMPUTATION OF INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 17,938 18,639 17,663 18,510
========= ========= ========= =========
Primary income per share $ .07 $ .35 $ .17 $ .63
========= ========= ========= =========
FULLY DILUTED INCOME PER SHARE:
Weighted average shares of common stock
outstanding (1) 17,938 18,639 17,663 18,510
Shares issuable from assumed conversion of:
Warrants 80 79 46 126
Stock options (1) 16 341 8 358
--------- --------- --------- ---------
Weighted average shares of common
stock outstanding, as adjusted 18,034 19,059 17,717 18,994
========= ========= ========= =========
Fully diluted income per share $ .07(2) $ .34(2) $ .17(2) $ .61(2)
========= ========= ========= =========
NET INCOME FOR PRIMARY AND
FULLY DILUTED COMPUTATION:
Net income (3) $ 1,269 $ 6,507 $ 2,959 $ 11,675
========= ========= ========= =========
</TABLE>
- ------------------
(1) Weighted average shares of common stock outstanding and shares issuable
from the assumed conversion of stock options for all periods have been
restated to include Exchangeable Shares and VES options (See Note 2 of
Notes to the Consolidated Financial Statements) on an equivalent share
basis.
(2) 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%.
(3) As combined - See Note 2 of Notes to the Consolidated Financial Statement.
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VERITAS DGC
INC.'S FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JANUARY, 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 15,523
<SECURITIES> 0
<RECEIVABLES> 105,645
<ALLOWANCES> 505
<INVENTORY> 2,126
<CURRENT-ASSETS> 129,858
<PP&E> 197,682
<DEPRECIATION> 102,668
<TOTAL-ASSETS> 260,458
<CURRENT-LIABILITIES> 62,058
<BONDS> 75,186
0
0
<COMMON> 161
<OTHER-SE> 120,924
<TOTAL-LIABILITY-AND-EQUITY> 260,458
<SALES> 0
<TOTAL-REVENUES> 167,096
<CGS> 0
<TOTAL-COSTS> 126,302
<OTHER-EXPENSES> 23,775
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,230
<INCOME-PRETAX> 13,789
<INCOME-TAX> 2,919
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,675
<EPS-PRIMARY> .63
<EPS-DILUTED> .61
</TABLE>
