<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 OCTOBER 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)
<TABLE>
<S> <C>
DELAWARE 76-0343152
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3701 Kirby Drive, Suite #112
Houston, Texas 77098
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 November 30, 1997 was 22,459,670 (including 2,367,071
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
FORM 10-Q
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<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income -
For the Three Months Ended October 31, 1996 and 1997 1
Consolidated Balance Sheets - July 31, 1997 and October 31, 1997 2
Consolidated Statements of Cash Flows -
For the Three Months Ended October 31, 1996 and 1997 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1996 1997
--------- ---------
<S> <C> <C>
REVENUES $ 76,405 $ 142,186
COSTS AND EXPENSES:
Cost of services 58,320 93,253
Depreciation and amortization 8,692 12,514
Selling, general and administrative 1,950 4,539
Other (income) expense:
Interest 1,263 2,034
Merger related costs 597
Other (256) (308)
--------- ---------
Total costs and expenses 70,566 112,032
--------- ---------
Income before provision for income taxes and equity in earnings of joint venture 5,839 30,154
Provision for income taxes 1,238 9,649
Equity in earnings of joint venture (567) (814)
--------- ---------
NET INCOME $ 5,168 $ 21,319
========= =========
PER SHARE OF COMMON STOCK:
Primary:
Earnings per share $ .28 $ .95
========= =========
Weighted average shares 18,382 22,424
========= =========
Fully diluted:
Earnings per share $ .27
=========
Weighted average shares 18,950
=========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par value and number of shares)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 71,177 $ 85,859
Restricted cash investments 550 557
Accounts and notes receivable (net of allowance for doubtful accounts: July $646; 120,946 130,953
October $1,062)
Materials and supplies inventory 2,333 2,519
Prepayments and other 10,429 9,401
--------- ---------
Total current assets 205,435 229,289
Property and equipment:
Seismic equipment 156,264 167,180
Data processing equipment 54,516 59,413
Leasehold improvements and other 29,978 29,552
--------- ---------
Total 240,758 256,145
Less accumulated depreciation 108,004 116,892
--------- ---------
Property and equipment - net 132,754 139,253
Multi-client data library 20,904 18,602
Investment in and advances to joint venture 2,908 3,994
Goodwill (net of accumulated amortization: July $2,725; October $2,852) 3,163 3,036
Deferred tax asset 6,385
Other assets 9,712 15,359
--------- ---------
Total $ 381,261 $ 409,533
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 383 $ 391
Accounts payable - trade 39,007 38,888
Accrued interest 2,188 362
Other accrued liabilities 38,669 44,463
Income taxes payable 3,118 973
--------- ---------
Total current liabilities 83,365 85,077
Non-current liabilities:
Long-term debt - less current maturities 75,588 75,472
Other non-current liabilities 1,007 1,140
--------- ---------
Total non-current liabilities 76,595 76,612
Stockholders' equity:
Preferred stock, $.01 par value; authorized: 1,000,000 shares; none issued
Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 19,982,040 and 200 200
20,092,599 shares (excluding 2,367,071 Exchangeable Shares) at July and October,
respectively
Additional paid-in capital 194,764 200,277
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 27,400 48,719
Cumulative foreign currency translation adjustment (1,063) (1,352)
--------- ---------
Total stockholders' equity 221,301 247,844
--------- ---------
Total $ 381,261 $ 409,533
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,168 $ 21,319
Non-cash items included in net income:
Depreciation and amortization 8,692 12,514
Loss on disposition of property and equipment 224 194
Equity in earnings of 50% or less-owned companies and joint ventures (567) (814)
Write-down of multi-client data library to market 436 80
Change in operating assets/liabilities:
Accounts and notes receivable (15,021) (10,007)
Materials and supplies inventory (630) (186)
Prepayments and other 89 1,028
Multi-client data library (2,883) 2,222
Other 1,421 (5,776)
Accounts payable - trade 4,481 (2,562)
Accrued interest 23 (1,826)
Other accrued liabilities 1,464 5,794
Income taxes payable 415 9,237
Other non-current liabilities (87) (102)
-------- --------
Total cash provided by operating activities 3,225 31,115
FINANCING ACTIVITIES:
Payments of secured term loans (6,000)
Payments of long-term debt (28,398) (108)
Borrowings from long-term debt 781
Net borrowings (payments) under credit agreement (11,458)
Borrowings from senior notes 75,000
Debt issue costs (2,461)
Net proceeds from sale of common stock 800 751
-------- --------
Total cash provided by financing activities 28,264 643
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash investments (203) (7)
Increase in investment in and advances to joint venture (1,000) (272)
Purchase of property and equipment (8,502) (16,639)
Sale of property and equipment 667 2
-------- --------
Total cash used by investing activities (9,038) (16,916)
Currency (gain) loss on foreign cash 214 (160)
-------- --------
Change in cash and cash equivalents 22,665 14,682
Beginning cash and cash equivalents balance 10,072 71,177
-------- --------
Ending cash and cash equivalents balance $ 32,737 $ 85,859
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended October 31,
-------------------------------
1996 1997
--------------- --------------
<S> <C> <C>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in property and equipment for:
Equipment purchase obligations $ 5,542
Accounts payable - trade 1,289 $ 2,443
Utilization of net operating losses existing prior to the quasi-reorganization resulting
in an increase (decrease) in:
Deferred tax asset valuation allowance (4,762)
Additional paid-in capital 4,762
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest -
Senior notes 3,656
Revolving credit agreement 205
Secured term loans 274
Equipment purchase obligations 689 19
Other 11 127
Income taxes 613 412
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
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
at October 31, 1997, and the results of its operations and its cash flows for
the three months ended October 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.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement requires the computation of basic earnings per share
based upon weighted-average common shares outstanding and diluted earnings per
share based upon weighted-average common shares outstanding and additional
common shares, utilizing the treasury stock method and average market prices,
that would have been outstanding if dilutive potential common shares had been
issued. In addition, previously reported earnings per share must be restated.
This statement is effective for interim and annual reporting periods ending
after December 15, 1997. Basic earnings per share will not differ from
previously reported primary earnings per share amounts. Diluted earnings per
share will include the effect of using the average market price for the period
instead of the higher of the average market price or the end of period price.
In addition, diluted earnings per share will be presented for all prior periods
where fully diluted earnings per share were not previously reported because
dilutive potential common shares did not result in more than 3% dilution.
Diluted earnings per share are not expected to differ materially from basic
earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires disclosure in both interim and annual reporting of the
reporting period's comprehensive income (changes in equity from non-owner
sources), net of the related tax effect, on the face of the consolidated
statement of income, consolidated statement of changes in stockholders' equity
or in a separate statement of comprehensive income and the accumulated balance
of other comprehensive income (comprehensive income excluding net income) as a
separate component in the stockholders' equity section of the consolidated
balance sheet. Classifications included in the accumulated balance are
disclosed on the face of the consolidated balance sheet or statement of changes
in stockholders' equity or in notes to the consolidated financial statements.
The Company's sources of comprehensive income include net income and cumulative
foreign currency translation adjustments. The Company will be required to
implement this statement in fiscal year 1999. Management has not completed its
assessment of how it will present the required information.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" which will supersede SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". It will require
the Company to disclose certain financial information in both annual and
interim reporting about "operating segments" which are components of a company
that are evaluated
5
<PAGE> 8
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
UNAUDITED
regularly by management in deciding how to allocate its resources and in
assessing its performance. It also requires disclosure about the countries from
which the Company derives its revenues and in which it employs its long-lived
assets. Major customers will continue to be disclosed. The Company will be
required to implement this statement in fiscal year 1999. Management has not
completed its assessment of how the adoption of this statement will affect its
existing segment disclosures.
EARNINGS PER SHARE
Primary earnings per share is computed based on the weighted average number of
shares of common stock, Exchangeable Stock issued in the business combination
between Veritas DGC Inc., formerly Digicon Inc., and Veritas Energy Services
Inc. and common stock equivalents. Common stock equivalents include stock
options and warrants. Shares 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%.
Fully diluted earnings per share is not presented for the three months ended
October 31, 1997 since stock options and warrants referenced above resulted in
dilution of less than 3%.
2. INVESTMENT IN INDONESIAN JOINT VENTURE
Summarized financial information for the Company's 80% owned Indonesian joint
venture (P.T. Digicon Mega Pratama), which is accounted for under the equity
method due to provisions in the joint venture agreement that give minority
shareholders the right to exercise control, is as follows:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
-------- -----------
(In thousands of dollars)
<S> <C> <C>
Current assets $ 3,697 $ 4,743
Property and equipment, net 60 55
Multi-client data library 228 168
-------- --------
Total assets $ 3,985 $ 4,966
======== ========
Current liabilities $ 1,077 $ 972
Advances from affiliates 14,784 15,055
Stockholders' deficit:
Common stock 2,576 2,576
Accumulated deficit (14,452) (13,637)
-------- --------
Total stockholders' deficit (11,876) (11,061)
-------- --------
Total liabilities and stockholders' deficit $ 3,985 $ 4,966
======== ========
</TABLE>
6
<PAGE> 9
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED OCTOBER 31, 1997
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------
1996 1997
--------- ---------
(In thousands of dollars)
<S> <C> <C>
Revenues $ 3,296 $ 1,450
Cost and expenses:
Cost of services 2,365 667
Depreciation and amortization 288 78
Other 1 (110)
--------- ---------
Total 2,654 635
--------- ---------
Income before provision for income taxes 642 815
Provision for income taxes 75
--------- ---------
Net income $ 567 $ 815
========= =========
</TABLE>
3. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1997
--------- -----------
(In thousands of dollars)
<S> <C> <C>
Senior notes due October 2003, at 9 3/4% $ 75,000 $ 75,000
Equipment purchase obligations maturing through September 2000,
at a weighted average rate of 9.29% at October 31, 1997 971 863
--------- ---------
Total 75,971 75,863
Less current maturities 383 391
--------- ---------
Due after one year $ 75,588 $ 75,472
========= =========
</TABLE>
The senior notes are due in October 2003 with interest payable semi-annually at
9 3/4%. The senior notes are unsecured and are effectively subordinated to
secured debt of the Company with respect to the assets securing such debt and
to all debt of its subsidiaries whether secured or unsecured. The indenture
relating to the senior notes contains certain covenants which limit the
Company's ability to, among other things, incur additional debt, pay dividends
and complete mergers, acquisitions and sales of assets. Upon a change in
control of the Company, as defined in the indenture, the holders of the senior
notes have the right to require the Company to purchase all or a portion of
such holder's senior note at a price equal to 101% of the aggregate principal
amount. The Company has the right to redeem the senior notes, in whole or part,
on or after October 15, 2000. Under certain conditions, the Company may redeem
up to $20.0 million in aggregate principal amount of the senior notes prior to
October 15, 1999.
The Company maintains a revolving credit agreement which matures in July 1998
with a commercial bank and provides advances up to $25.0 million of which $20.0
million are secured by substantially all of the receivables of the Company.
Advances bear interest, at the Company's election, at LIBOR plus two percent or
prime rate and are 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
7
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VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the Three Months Ended October 31, 1997
UNAUDITED
tangible net worth, limits the ratio of funded debt to total capitalization,
and requires the Company to maintain a minimum current ratio.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities included $8.3 million and $7.0 million of accrued
payroll and benefits and $14.3 million and $19.4 million of deferred revenues
as of July 31, 1997 and October 31, 1997, respectively.
5. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
Three Months Ended
October 31,
----------------------
1996 1997
--------- ---------
(In thousands of dollars)
<S> <C> <C>
Net foreign currency exchange (gains) losses $ (395) $ 595
Net loss on disposition of property and equipment 224 194
Interest income (95) (1,074)
Other 10 (23)
--------- ---------
Total $ (256) $ (308)
========= =========
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH THREE MONTHS ENDED OCTOBER
31, 1996
Revenues. Total revenues increased 86% from $76.4 million to $142.2 million.
Multi-client data sales increased 917% from $4.2 million to $42.3 million due
to expanding customer interest in the Gulf of Mexico deepwater and sub-salt
areas. Over the past two years as oil and gas companies have moved towards
multi-client surveys to reduce the finding costs in these areas, the Company
has significantly increased its data library. The Company has 1,140,000 line
kilometers in its data library of which 140,000 line kilometers were added
during the quarter ended October 31, 1997.
Land and transition zone acquisition revenues increased 47% from $40.5 million
to $59.3 million as a result of firm prices, additional recording capacity and
operating efficiencies from upgraded and standardized equipment.
Data processing operations increased 44% from $15.4 million to $22.3 million
due to increased market activity and the demand for computer intensive
processes, such as prestack time and depth migration, to process the larger
volumes of data acquired in three dimensional surveys. The Company has
substantially upgraded its processing centers, including the addition of a NEC
supercomputer in the U.K. in August 1997, to meet this increased demand.
Marine acquisition revenues increased 12% from $16.3 million to $18.3 million
primarily due to higher productivity from the upgrade to Syntron equipment in
the prior fiscal year.
Operating Expenses. Costs of services increased 60% from $58.3 million to $93.3
million, but as a percent of revenues decreased from 76% to 66%. The
improvement in operating margins is attributable to the significant sales of
multi-client data surveys which generally have higher margins, higher prices as
a result of increased market demand, better equipment utilization and higher
productivity for all service groups as discussed above.
Depreciation and Amortization. Depreciation and amortization expense increased
44% from $8.7 million to $12.5 million due to the $96.1 million 1997 capital
expenditure program.
Selling, General and Administrative. Selling, general and administrative
expenses increased 133% from $2.0 million to $4.5 million, resulting primarily
from costs incurred in implementing new administrative and accounting systems
and pursuing a more aggressive marketing strategy.
Interest. Interest expense increased 61% from $1.3 million to $2.0 million due
to increased debt levels required to finance the Company's 1997 capital
expenditure program. The Company issued $75 million of senior notes in late
October 1996.
Merger Related Costs. Merger related costs in the prior year consist primarily
of one month of investment banking and professional fees and expenses incurred
in connection with the Company's August 1996 business combination with Veritas
Energy Services Inc.
Income Taxes. Provision for income taxes increased from $1.2 million to $9.6
million as a result of increased profitability of the Company.
Equity in earnings. Equity in earnings is related to the Indonesian joint
venture. An increase in marine acquisition surveys account for the increased
profitability of the joint venture in the current year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's internal sources of liquidity are cash, short-term investments
and cash flow from operations. External sources include the unutilized portion
of a revolving credit facility, public financings, equipment financing and
trade credit.
9
<PAGE> 12
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 37% of revenues for the quarter ended October 31, 1997 were
attributable to the Company's foreign operations. In addition, the Company has
increased its participation in multi-client data surveys and has significantly
expanded its library of multi-client data. Because of the lead-time between
survey execution and sale, partially funded multi-client data surveys generally
require greater amounts of working capital than contract work. Depending on the
timing of future sales of the data and the collection of the proceeds from such
sales, the Company's liquidity will be affected; however, the Company believes
that these non-exclusive surveys have good long-term sales, earnings and cash
flow potential.
The Company's capital expenditure program for 1998 is $93.0 million and
includes expenditures of $26.0 million to maintain or replace the Company's
current operating equipment and $67.0 million to expand capacity. The Company
plans to spend $4.6 million in fiscal 1998 for research and development.
In October 1996, the Company completed a $75.0 million public offering of
Senior Notes due in October 2003 (the "Senior Notes"). The net proceeds from
the Senior Notes were used to retire outstanding indebtedness of the Company
and fund a portion of the Company's capital expenditures in fiscal 1997. The
indenture relating to the Senior Notes (the "Indenture") contains certain
covenants, including covenants that limit the Company's ability to, among other
things, incur additional debt, pay dividends and complete mergers, acquisitions
and sales of assets. The Company is in compliance with all covenants of the
agreement at October 31, 1997. Upon a change in control of the Company (as
defined in the Indenture), holders of the Senior Notes have the right to
require the Company to purchase all or a portion of such holder's Senior Note
at a price equal to 101% of the aggregate principal amount. Interest is payable
semi-annually beginning April 1997.
In July 1997, the Company completed a public offering (the "Offering") of
3,450,000 shares of common stock (including the underwriters' overallotment
option of 450,000 shares). A portion of the net proceeds from the Offering of
$76.4 million was used for 1997 capital expenditures and the remainder will be
used to fund a portion of the Company's fiscal 1998 $93.0 million capital
expenditure program and for other general corporate purposes, including working
capital, possible repurchases of outstanding Senior Notes and possible
acquisitions. No repurchases will be made of outstanding Senior Notes, except
at prices which are, at the time of any such repurchase, regarded by the
Company to be attractive. Accordingly, there can be no assurance that any such
repurchases will be made. While the Company regularly evaluates opportunities
to acquire complementary businesses, it has no present agreements or
commitments with respect to possible acquisitions, and no estimate can be made
as to the amount of net proceeds which ultimately may be used for acquisitions.
The Company maintains a $25.0 million revolving credit facility, as amended
(the "Credit Facility"), with a commercial bank which will mature in July 1998.
Advances up to $20.0 million under the Credit Facility are secured by
substantially all of the Company's receivables. All advances bear interest, at
the Company's election, at LIBOR plus two percent or prime rate and are 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 prohibit the payment of cash dividends and limit, among other
things, the Company's right to create indebtedness and make capital
expenditures over a certain amount in any fiscal year. In addition, the Credit
Facility requires minimum cash flow coverage and the maintenance of minimum
tangible net worth, limits the ratio of funded debt to total capitalization,
and requires the Company to maintain a minimum current ratio. The Company is in
compliance with all covenants of the agreement and has no outstanding advances
at October 31, 1997.
Since the Company's quasi-reorganization with respect to Digicon Inc. on July
31, 1991, the tax benefits of net operating loss carryforwards existing at the
date of the quasi-reorganization have been recognized through a direct addition
to paid-in capital, when realization is more likely than not. Additionally, the
10
<PAGE> 13
utilization of the net operating loss carryforwards existing at the date of the
quasi-reorganization are subject to certain limitations. During the quarter
ended October 31, 1997 the Company recognized $4.8 million related to these
benefits, due to the increased profitability of the Company during the current
fiscal year and anticipated profitability in future fiscal years.
The Company will require substantial cash flow to continue operations on a
satisfactory basis, complete its capital expenditure and research and
development programs and meet its principal and interest obligations with
respect to outstanding indebtedness. The Company anticipates that cash and
short-term investments, net proceeds from the Offering, cash flow generated
from operations and borrowings permitted under the Indenture and Credit
Facility will provide sufficient liquidity to fund these requirements through
fiscal 1998. However, the Company's ability to meet its debt service and other
obligations depends on its future performance, which, in turn, is subject to
general economic conditions, business and other factors beyond the Company's
control. If the Company is unable to generate sufficient cash flow from
operations or otherwise to comply with the terms of the Credit Facility or the
Indenture, it may be required to refinance all or a portion of its existing
debt or obtain additional financing. There can be no assurance that the Company
would be able to obtain such refinancing or financing, or that any refinancing
or financing would result in a level of net proceeds required.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1997 at the Annual Meeting of Stockholders of Veritas DGC Inc.,
stockholders voted:
1. To elect each of the ten directors nominated for the board of directors as
follows:
<TABLE>
<CAPTION>
For Against
---------- -------
<S> <C> <C>
Clayton P. Cormier 19,507,417 807,095
Ralph M. Eeson 19,724,817 589,695
Lawrence C. Fichtner 19,727,857 586,655
James R. Gibbs 19,727,637 586,875
Steven J. Gilbert 19,727,967 586,545
Stephen J. Ludlow 19,727,967 586,545
Brian F. MacNeill 19,727,967 586,545
David B. Robson 19,727,757 586,755
Douglas B. Thompson 19,510,357 804,155
Jack C. Threet 19,507,357 807,155
</TABLE>
2. Upon a proposal to adopt a 1997 Employee Stock Purchase Plan which allows
qualifying employees to purchase specified amounts of the Company's stock
at a discount from market price.
Votes cast for the above matter were 16,658,972; votes against the above
matter were 601,242. There were 109,795 abstentions and 2,944,503 broker
non-votes.
and
3. Upon the proposed amendment to the Company's Amended and Restated 1992
Employee Nonqualified Stock Option Plan which would increase the number of
shares of common stock which may be issued or covered by options by
1,041,667 shares.
Votes cast for the above matter were 11,070,584; votes against the above
matter were 6,188,436. There were 110,989 abstentions and 2,944,503 broker
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS FILED WITH THIS REPORT:
Exhibit
-------
2) Combination Agreement dated as of May 10, 1996, between Digicon
Inc. and Veritas Energy Services Inc. (Exhibit 2.1 of Digicon
Inc.'s Current Report on Form 8-K dated May 10, 1996 is
incorporated herein by reference.)
3-A) Restated Certificate of Incorporation with amendments of Digicon
Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s
Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.)
3-B) Certificate of Ownership and Merger of New Digicon Inc. and
Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement
No. 33-43873 dated November 12, 1991 is incorporated herein by
reference.)
12
<PAGE> 15
3-C) By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to
Digicon Inc.'s Registration Statement No. 33-43873 dated November
12, 1991 is incorporated herein by reference).
4-A) Specimen certificate for Senior Notes. (Included as part of
Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration
Statement No. 333-12481 dated September 20, 1996 is incorporated
herein by reference.)
4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due
2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet
National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s
Registration Statement No. 333-12481 dated September 20, 1996 is
incorporated herein by reference.)
4-C) Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit 4-C
to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996
is incorporated herein by reference.)
4-D) Rights Agreement between Veritas DGC Inc. and ChaseMellon
Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit
4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27,
1997 is incorporated herein by reference.)
10-A) Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B
to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30,
1997 is incorporated herein by reference.)
10-B) Amended and Restated 1992 Non-Employee Director Stock Option Plan.
(Exhibit 4.2 to Veritas DGC Inc.'s Registration Statement No.
333-41829 dated December 10, 1997 is incorporated herein by
reference.)
10-C) Second Amended and Restated 1992 Employee Nonqualified Stock
Option Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration
Statement No. 333-41829 dated December 10, 1997 is incorporated
herein by reference.)
10-D) Support Agreement dated August 30, 1996, between Digicon Inc. and
Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s
Current Report on Form 8-K, dated August 30, 1996 is incorporated
herein by reference.)
10-E) Credit Agreement dated July 18, 1996, among Digicon Inc. and
Digicon Geophysical Corp., Digicon/GFS Inc., Digicon Geophysical
Limited and Digicon Exploration, Ltd., as Borrowers, each of the
banks named therein, and Wells Fargo Bank (Texas), National
Association, as issuing bank, as a bank and as agent for the banks
(the "Credit Agreement") (Exhibit 10-G of Veritas DGC Inc.'s
Amendment No. 1 to Registration Statement No. 333-12481, dated
October 2, 1996 is incorporated herein by reference.)
10-F) Letter dated September 27, 1996, from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement.
(Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to
Registration Statement No. 333-12481, dated October 2, 1996 is
incorporated herein by reference.)
10-G) Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to
Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997
is incorporated herein by reference.)
10-H) Letter dated May 28, 1997, from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement.
(Exhibit 10-J to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 1997 is incorporated herein by reference.)
13
<PAGE> 16
10-I) Severance Agreement between Veritas DGC Inc. and Richard W.
McNairy. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the
year ended July 31, 1997 is incorporated herein by reference.)
10-J) Employment Agreement executed by David B. Robson. (Exhibit 10-L to
Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is
incorporated herein by reference.)
10-K) Employment Agreement executed by Lawrence C. Fichtner. (Exhibit
10-M to Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-L) Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit
10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-M) Restricted Stock Agreement dated April 1, 1997 between Veritas DGC
Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form
10-K for the year ended July 31, 1997 is incorporated herein by
reference.)
10-N) 1997 Employee Stock Purchase Plan (Exhibit 4.1 to Veritas DGC
Inc.'s Registration Statement No. 333-38377 dated October 21, 1997
is incorporated herein by reference.)
*11) Computation of income per common and common equivalent share.
*27) Financial Data Schedule.
* Filed herewith
b) REPORTS ON FORM 8-K
There were no reports on Form 8-K during the quarter ended October 31,
1997.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on the 15th day of December, 1997.
VERITAS DGC INC.
By: /s/ David B. Robson
--------------------------------------------------
DAVID B. ROBSON
Chairman of the Board and Chief Executive Officer
/s/ Anthony Tripodo
--------------------------------------------------
ANTHONY TRIPODO
Executive Vice President, Chief Financial and
Accounting Officer and Treasurer
15
<PAGE> 18
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
-------
<S> <C>
2) Combination Agreement dated as of May 10, 1996, between Digicon
Inc. and Veritas Energy Services Inc. (Exhibit 2.1 of Digicon
Inc.'s Current Report on Form 8-K dated May 10, 1996 is
incorporated herein by reference.)
3-A) Restated Certificate of Incorporation with amendments of Digicon
Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s
Current Report on Form 8-K dated September 16, 1996 is
incorporated herein by reference.)
3-B) Certificate of Ownership and Merger of New Digicon Inc. and
Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement
No. 33-43873 dated November 12, 1991 is incorporated herein by
reference.)
3-C) By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to
Digicon Inc.'s Registration Statement No. 33-43873 dated November
12, 1991 is incorporated herein by reference).
4-A) Specimen certificate for Senior Notes. (Included as part of
Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration
Statement No. 333-12481 dated September 20, 1996 is incorporated
herein by reference.)
4-B) Form of Trust Indenture relating to the 9 3/4% Senior Notes due
2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet
National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s
Registration Statement No. 333-12481 dated September 20, 1996 is
incorporated herein by reference.)
4-C) Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit 4-C
to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996
is incorporated herein by reference.)
4-D) Rights Agreement between Veritas DGC Inc. and ChaseMellon
Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit
4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27,
1997 is incorporated herein by reference.)
10-A) Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B
to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30,
1997 is incorporated herein by reference.)
10-B) Amended and Restated 1992 Non-Employee Director Stock Option Plan.
(Exhibit 4.2 to Veritas DGC Inc.'s Registration Statement No.
333-41829 dated December 10, 1997 is incorporated herein by
reference.)
10-C) Second Amended and Restated 1992 Employee Nonqualified Stock
Option Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration
Statement No. 333-41829 dated December 10, 1997 is incorporated
herein by reference.)
10-D) Support Agreement dated August 30, 1996, between Digicon Inc. and
Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s
Current Report on Form 8-K, dated August 30, 1996 is incorporated
herein by reference.)
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
10-E) Credit Agreement dated July 18, 1996, among Digicon Inc. and
Digicon Geophysical Corp., Digicon/GFS Inc., Digicon Geophysical
Limited and Digicon Exploration, Ltd., as Borrowers, each of the
banks named therein, and Wells Fargo Bank (Texas), National
Association, as issuing bank, as a bank and as agent for the banks
(the "Credit Agreement") (Exhibit 10-G of Veritas DGC Inc.'s
Amendment No. 1 to Registration Statement No. 333-12481, dated
October 2, 1996 is incorporated herein by reference.)
10-F) Letter dated September 27, 1996, from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement.
(Exhibit 10-H of Veritas DGC Inc.'s Amendment No. 1 to
Registration Statement No. 333-12481, dated October 2, 1996 is
incorporated herein by reference.)
10-G) Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to
Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997
is incorporated herein by reference.)
10-H) Letter dated May 28, 1997, from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement.
(Exhibit 10-J to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 1997 is incorporated herein by reference.)
10-I) Severance Agreement between Veritas DGC Inc. and Richard W.
McNairy. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the
year ended July 31, 1997 is incorporated herein by reference.)
10-J) Employment Agreement executed by David B. Robson. (Exhibit 10-L to
Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is
incorporated herein by reference.)
10-K) Employment Agreement executed by Lawrence C. Fichtner. (Exhibit
10-M to Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-L) Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit
10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-M) Restricted Stock Agreement dated April 1, 1997 between Veritas DGC
Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form
10-K for the year ended July 31, 1997 is incorporated herein by
reference.)
10-N) 1997 Employee Stock Purchase Plan (Exhibit 4.1 to Veritas DGC
Inc.'s Registration Statement No. 333-38377 dated October 21, 1997
is incorporated herein by reference.)
*11) Computation of income per common and common equivalent share.
*27) Financial Data Schedule.
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 11
VERITAS DGC INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON AND
COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
OCTOBER 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
PRIMARY INCOME PER SHARE:
Weighted average shares of common stock outstanding 18,382 22,424
========= =========
Primary income per share $ .28 $ .95
========= =========
FULLY DILUTED INCOME PER SHARE:
Weighted average shares of common stock outstanding 18,382 22,424
Shares issuable from assumed conversion of:
Warrants 174 37
Stock options 394 334
--------- ---------
Weighted average shares outstanding, as adjusted 18,950 22,795(1)
========= =========
Fully diluted income per share $ .27 $ .94
========= =========
NET INCOME FOR PRIMARY AND FULLY DILUTED COMPUTATION $ 5,168 $ 21,319
========= =========
</TABLE>
(1) 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 85,859
<SECURITIES> 0
<RECEIVABLES> 132,015
<ALLOWANCES> 1,062
<INVENTORY> 2,519
<CURRENT-ASSETS> 229,289
<PP&E> 256,145
<DEPRECIATION> 116,892
<TOTAL-ASSETS> 409,533
<CURRENT-LIABILITIES> 85,077
<BONDS> 0
0
0
<COMMON> 200
<OTHER-SE> 247,644
<TOTAL-LIABILITY-AND-EQUITY> 409,533
<SALES> 0
<TOTAL-REVENUES> 142,186
<CGS> 0
<TOTAL-COSTS> 93,253
<OTHER-EXPENSES> 18,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,034
<INCOME-PRETAX> 30,154
<INCOME-TAX> 9,649
<INCOME-CONTINUING> 21,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,319
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
</TABLE>
