<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 APRIL 30, 1998
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 Identification No.)
incorporation or organization)
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 May 31, 1998 was 22,730,051 (including 1,511,955
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
<TABLE>
<CAPTION>
===============================================================================================
Page Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income -
For the Three and Nine Months Ended April 30, 1997 and 1998 1
Consolidated Balance Sheets - July 31, 1997 and April 30, 1998 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended April 30, 1997 and 1998 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 6. Exhibits and Reports on Form 8-K 13
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 Nine Months Ended
April 30, April 30,
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 86,843 $ 122,810 $ 253,939 $ 388,565
COSTS AND EXPENSES:
Cost of services 63,344 75,381 189,646 249,438
Depreciation and amortization 10,142 14,385 28,662 39,849
Selling, general and administrative 3,221 5,405 7,603 14,198
Other (income) expense:
Interest 2,104 2,009 5,334 6,061
Merger related costs 597
Other 535 (1,009) 811 (2,047)
------------ ------------ ------------ ------------
Total costs and expenses 79,346 96,171 232,653 307,499
------------ ------------ ------------ ------------
Income before provision for income taxes and equity 7,497 26,639 21,286 81,066
in (earnings) loss of joint venture
Provision for income taxes 1,341 11,055 4,260 27,209
Equity in (earnings) loss of joint venture 70 (478) (735) (1,201)
------------ ------------ ------------ ------------
NET INCOME $ 6,086 $ 16,062 $ 17,761 $ 55,058
============ ============ ============ ============
PER SHARE:
Earnings per common share $ .32 $ .71 $ .95 $ 2.44
============ ============ ============ ============
Weighted average common shares 18,819 22,645 18,611 22,535
============ ============ ============ ============
Earnings per common share - assuming dilution $ .32 $ .69 $ .93 $ 2.37
============ ============ ============ ============
Weighted average common shares - assuming dilution 19,152 23,347 19,048 23,273
============ ============ ============ ============
</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, April 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 71,177 $ 92,511
Restricted cash investments 550 571
Accounts and notes receivable (net of allowance for doubtful accounts: July
$646; April $1,232) 120,946 143,520
Materials and supplies inventory 2,333 3,498
Prepayments and other 10,429 17,325
------------ ------------
Total current assets 205,435 257,425
Property and equipment:
Seismic equipment 156,264 177,822
Data processing equipment 54,516 66,652
Seismic ship 6,636
Leasehold improvements and other 29,978 43,593
------------ ------------
Total 240,758 294,703
Less accumulated depreciation 108,004 141,569
------------ ------------
Property and equipment - net 132,754 153,134
Multi-client data library 20,904 34,677
Investment in and advances to joint venture 2,908 3,879
Goodwill (net of accumulated amortization: July $2,725; April $3,107) 3,163 2,781
Deferred tax asset 6,385 14,266
Other assets 9,712 8,472
------------ ------------
Total $ 381,261 $ 474,634
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 383 $ 292
Accounts payable - trade 39,007 45,200
Accrued interest 2,188 385
Other accrued liabilities 38,669 57,377
Income taxes payable 791 2,502
------------ ------------
Total current liabilities 81,038 105,756
Non-current liabilities:
Long-term debt - less current maturities 75,588 75,340
Other non-current liabilities 3,334 9,633
------------ ------------
Total non-current liabilities 78,922 84,973
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: 200 211
19,982,040 and
21,184,837 shares (excluding 2,367,071 and 1,526,183 Exchangeable
Shares) at July
and April, respectively
Additional paid-in capital 194,764 203,039
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 27,400 82,458
Cumulative foreign currency translation adjustment (1,063) (1,803)
------------ ------------
Total stockholders' equity 221,301 283,905
============ ============
Total $ 381,261 $ 474,634
============ ============
</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>
Nine Months Ended
April 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 17,761 $ 55,058
Non-cash items included in net income:
Depreciation and amortization 28,662 39,849
Loss on disposition of property and equipment 783 464
Equity in earnings of 50% or less-owned companies and joint ventures (735) (1,201)
Write-down of multi-client data library to market 989 460
Change in operating assets/liabilities:
Accounts and notes receivable (35,342) (22,574)
Materials and supplies inventory (882) (1,165)
Prepayments and other (1,107) (6,896)
Multi-client data library (2,611) (14,233)
Deferred tax asset (3,119)
Other (1,588) 1,111
Accounts payable - trade 9,303 3,750
Accrued interest 68 (1,803)
Other accrued liabilities 10,675 18,708
Income taxes payable 561 1,711
Other non-current liabilities 1,010 6,299
------------ ------------
Total cash provided by operating activities 27,547 76,419
FINANCING ACTIVITIES:
Borrowings from senior notes 75,000
Debt issue costs (2,765)
Payments of secured term loans (10,072)
Net payments under credit agreement (8,118)
Borrowings from long-term debt 781
Payments of long-term debt (25,584) (339)
Net proceeds from sale of common stock 3,691 3,524
------------ ------------
Total cash provided by financing activities 32,933 3,185
INVESTING ACTIVITIES:
Increase in restricted cash investments (215) (21)
Decrease in investment in and advances to joint venture 1,428 230
Purchase of property and equipment (59,063) (57,921)
Sale of property and equipment 812 53
------------ ------------
Total cash used by investing activities (57,038) (57,659)
Currency (gain) loss on foreign cash 617 (611)
------------ ------------
Change in cash and cash equivalents 4,059 21,334
Beginning cash and cash equivalents balance 10,072 71,177
------------ ------------
Ending cash and cash equivalents balance $ 14,131 $ 92,511
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in property and equipment for:
Equipment purchase obligations $ 6,388
Accounts payable - trade 7,705 $ 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 3,494 7,622
Revolving credit agreement 236
Secured term loans 274
Equipment purchase obligations 755 91
Other 278 277
Income taxes 1,589 21,433
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998
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
April 30, 1998, and the results of its operations and its cash flows for the
three and nine months ended April 30, 1997 and 1998. The results of operations
for any interim period are not necessarily indicative of the results to be
expected for a full year. 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 June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 may be
disclosed on the face of the consolidated balance sheet, 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 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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which will supersede the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers'
5
<PAGE> 8
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998
Accounting for Postretirement Benefits Other Than Pensions." This statement
addresses disclosures only and will require the Company to provide a
reconciliation of the beginning and ending balances of the benefit obligation
and the fair value of plan assets in addition to disclosures already presented.
The Company will be required to implement this statement in fiscal year 1999.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified for consistent presentation.
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, April 30,
1997 1998
------------ ------------
(In thousands of dollars)
<S> <C> <C>
Current assets $ 3,697 $ 4,179
Property and equipment, net 60 169
Multi-client data library 228 48
------------ ------------
Total assets $ 3,985 $ 4,396
============ ============
Current liabilities $ 1,077 $ 517
Advances from affiliates 14,784 14,554
Stockholders' deficit:
Common stock 2,576 2,576
Accumulated deficit (14,452) (13,251)
------------ ------------
Total stockholders' deficit (11,876) (10,675)
------------ ------------
Total liabilities and stockholders' deficit $ 3,985 $ 4,396
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------------- --------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Revenues $ 718 $ 1,163 $ 4,954 $ 2,967
Cost and expenses:
Cost of services 717 612 3,761 1,855
Depreciation and amortization 79 61 469 219
Other (income) expense (8) 12 (11) (308)
---------- ---------- ---------- ----------
Total 788 685 4,219 1,766
---------- ---------- ---------- ----------
Net income (loss) $ (70) $ 478 $ 735 $ 1,201
========== ========== ========== ==========
</TABLE>
6
<PAGE> 9
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998
3. LONG-TERM DEBT
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
July 31, April 30,
1997 1998
------------ ------------
(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 April 30, 1998 971 632
------------ ------------
Total 75,971 75,632
Less current maturities 383 292
------------ ------------
Due after one year $ 75,588 $ 75,340
============ ============
</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 defined 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.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities included $8.3 million and $10.7 million of accrued
payroll and benefits and $14.3 million and $28.5 million of deferred revenues as
of July 31, 1997 and April 30, 1998, respectively.
5. EMPLOYEE STOCK PURCHASE PLAN
On November 1, 1997, the Company initiated a noncompensatory employee stock
purchase plan for up to 500,0000 shares of common stock. Participation is
voluntary and substantially all full-time employees meeting limited eligibility
requirements may participate. Contributions are made through payroll deductions
and may not be less than 1% or more than 15% of the participant's base pay as
defined. The participant's option to purchase common stock is deemed to be
granted on the first day and exercised on
7
<PAGE> 10
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1998
the last day of the fiscal quarter at a price which is the lower of 85% of the
market price on the first or last day of the fiscal quarter.
6. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Interest income $ (47) $ (1,263) $ (425) $ (3,403)
Net loss on disposition of property and equipment 344 31 783 464
Net foreign currency exchange losses 253 222 477 1,076
Other (15) 1 (24) (184)
------------ ------------ ------------ ------------
Total $ 535 $ (1,009) $ 811 $ (2,047)
============ ============ ============ ============
</TABLE>
7. EARNINGS PER COMMON SHARE
Earnings per common share and earnings per common share-assuming dilution are
computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income $ 6,086 $ 16,062 $ 17,761 $ 55,058
============ ============ ============ ============
Weighted average common shares 18,819 22,645 18,611 22,535
============ ============ ============ ============
Earnings per common share $ .32 $ .71 $ .95 $ 2.44
============ ============ ============ ============
Weighted average common shares - assuming dilution:
Weighted average common shares 18,819 22,645 18,611 22,535
Shares issuable from assumed conversion of:
Options 301 702 342 726
Warrants 32 95 12
------------ ------------ ------------ ------------
Total 19,152 23,347 19,048 23,273
============ ============ ============ ============
Earnings per common share - assuming dilution $ .32 $ .69 $ .93 $ 2.37
============ ============ ============ ============
</TABLE>
Exchangeable Stock issued in the business combination between Veritas DGC Inc.,
formerly Digicon Inc., and Veritas Energy Services Inc. is included in both
computations. Options to purchase 27,802 at exercise prices ranging from $45
5/16 to $54 3/16 and expiring through April 2008 and 41,051 common shares at
exercise prices ranging from $40 5/16 to $54 3/16 and expiring through April
2008 have been excluded from the computation assuming dilution for the three and
nine months ended April 30, 1998, respectively, because the options' exercise
prices exceeded the average market price of the underlying common shares.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors
which are more fully described in other reports filed with the Securities and
Exchange Commission and include changes in market conditions in the oil and gas
industry as well as declines in prices of oil and gas.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1998 COMPARED WITH THREE MONTHS ENDED APRIL 30,
1997
Revenues. Revenues increased 41% from $86.8 million to $122.8 million during the
current quarter. Increases were recorded by all service groups; however, data
library sales showed the largest increase at 178% from $10.7 million to $29.7
million primarily as a result of an increase in demand for multi-client surveys
performed in the Gulf of Mexico deepwater and sub-salt areas and in the North
Sea. Over the past two years, as oil and gas companies have moved toward
multi-client surveys to reduce finding costs, the Company has significantly
increased its data library inventory.
Land and transition zone acquisition revenues increased 28% from $42.2 million
to $54.1 million and was attributable to additional recording capacity,
including the purchase of two new crews in Oman and the addition of one crew in
South America. These increases were partially offset by a decrease in revenues
in Canada as a result of warmer than usual winter weather and an early spring
breakup.
Data processing revenues increased 15% from $20.4 million to $23.4 million due
to increased market activity, increased demand for computer intensive processes,
such as prestack time and depth migration and the larger volumes of data
acquired in three dimensional surveys. The Company has substantially upgraded
its processing centers, including the addition of another NEC supercomputer in
August 1997 for use in the U.K. and several multi-noded workstations in the
current quarter, to meet this increased demand.
Marine revenues increased 16% from $13.5 million to $15.6 million due to
expanding customer interest in the Gulf of Mexico multi-client surveys as
discussed above. Revenues did not increase as dramatically for this service
group due to four vessels being in dry dock for regularly scheduled maintenance
at various times throughout the quarter.
Operating Expenses. Costs of services increased 19% from $63.3 million to $75.4
million, but as a percent of revenues decreased from 73% to 61%. The improvement
in operating margins is mainly attributable to the data library and marine
service groups as a result of the significant sales and performance of
multi-client data surveys that generally have higher margins. Data processing
operating margins also improved as a result of an increase in capacity of more
efficient computers and software. Land and transition zone margins decreased
slightly as a result of an unusually warm winter season in Canada.
Depreciation and Amortization. Depreciation and amortization expense increased
43% from $10.1 million to $14.4 million due to capital expenditures of $156.4
million over the last 21 months.
Selling, General and Administrative. Selling, general and administrative
expenses increased 69% from $3.2 million to $5.4 million resulting primarily
from costs incurred in implementing new administrative and accounting systems
and pursuing a more aggressive marketing strategy.
Other Income. Other income increased $1.5 million primarily from interest income
earned on the higher average cash balances maintained by the Company.
Income Taxes. Provision for income taxes increased from $1.3 million to $11.1
million as a result of the increased profitability of the Company.
Equity in earnings. Equity in earnings is related to the Indonesian joint
venture. More marine acquisition surveys were performed in the current year that
increased profitability of the joint venture.
9
<PAGE> 12
NINE MONTHS ENDED APRIL 30, 1998 COMPARED WITH NINE MONTHS ENDED APRIL 30, 1997
Revenues. Revenues increased 53% from $253.9 million to $388.6 million during
the current period. Although all service groups improved, multi-client data
sales showed the largest increase at 209% from $31.1 million to $96.2 million.
Sales of Gulf of Mexico data provided the largest increase, but sales from the
Company's North Sea and land data libraries also contributed to the increase.
Land and transition zone acquisition revenues increased 31% from $126.2 million
to $164.8 million as a result of additional recording capacity, including the
purchase of two new crews in Oman and the addition of one crew in South America,
and operating efficiencies from upgraded and standardized equipment. Warmer than
usual winter conditions and an early spring breakup in Canada had a negative
impact on these revenues.
Marine acquisition revenues increased 38% from $42.7 million to $59.1 million
primarily due to additional streamer capacity and an increase in demand,
particularly in Gulf of Mexico multi-client data surveys.
Data processing revenues increased 27% from $53.9 million to $68.5 million due
to increases in market activity, demand for computer intensive processes and
capacity to meet this demand.
Operating Expenses. Costs of services increased 32% from $189.6 million to
$249.4 million, but as a percent of revenues decreased from 75% to 64%. The
improvement in operating margins is mainly attributable to the data library and
marine service groups as a result of the significant sales and performance of
multi-client data surveys. Data processing operating margins also showed
improvement as a result of more efficient equipment. Land and transition zone
margins remained consistent as a result of the warmer than usual winter in
Canada.
Depreciation and Amortization. Depreciation and amortization expense increased
39% from $28.7 million to $39.8 million due to the large increase in capital
expenditures over the past 21 months.
Selling, General and Administrative. Selling, general and administrative
expenses increased 87% from $7.6 million to $14.2 million resulting primarily
from costs incurred in implementing new administrative and accounting systems
and pursuing a more aggressive marketing strategy.
Interest. Interest expense increased slightly from $5.3 million to $6.1 million
due to the issuance of $75.0 million of senior notes in late October 1996 which
replaced approximately $40.0 million in other debt.
Other Income. Other income increased $2.9 million primarily from interest income
earned on the higher average cash balances maintained by the Company.
Income Taxes. Provision for income taxes increased from $4.3 million to $27.2
million as a result of the increased profitability of the Company.
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 financing, equipment financing and trade
credit.
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 53% of revenues for the quarter ended April 30, 1998 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.
10
<PAGE> 13
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 $104.0 million and
includes expenditures of $26.0 million to maintain or replace the Company's
current operating equipment and $78.0 million to expand capacity, including the
purchase of a marine seismic vessel previously chartered and the outfitting of a
new marine seismic vessel. The Company plans to spend $6.2 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 April 30, 1998. 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.
In July 1997, the Company completed a public offering (the "Offering") of
3,450,000 shares of common stock. A portion of the net proceeds from the
Offering of $76.4 million was used for 1997 and 1998 capital expenditures and
the remainder will be used 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 that 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 defined
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 April 30,
1998. The Company expects to extend or replace the Credit Facility in July 1998.
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
utilization of the net operating loss carryforwards existing at the date of the
quasi-reorganization is subject to certain limitations. During the nine months
ended April 30, 1998 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 the next fiscal year.
The Company has prepared a formal plan to address Year 2000 issues as they
relate to the Company's business and its operations. In accordance with that
plan, the Company has evaluated all internal hardware and software used in its
operations. The Company has also identified all external relationships
11
<PAGE> 14
and mailed each entity an internally prepared questionnaire addressing their
state of readiness regarding Year 2000 issues. Approximately 85% of the
questionnaires, which are due to the Company by August 31, 1998, have been
returned. The Company has prepared a replacement schedule for hardware and
software that is not Year 2000 compliant that has been identified to date. In
addition, the Company is preparing a contingency plan to address any
unidentified internal or external hardware and software that is not Year 2000
compliant. The Company estimates that it will complete its plan, including
remedial actions, by June 30, 1999 and is not aware of any material
contingencies or costs that will be incurred in order to be Year 2000 compliant.
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.
12
<PAGE> 15
PART II. OTHER INFORMATION
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.)
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.)
4-E) Form S-8 Restricted Stock Grant Agreement (Exhibit 4.8 to
Veritas DGC Inc.'s Registration Statement No. 333-48953 dated
March 31, 1998 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.)
13
<PAGE> 16
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.)
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.)
*27) Financial Data Schedule.
* Filed herewith
b) REPORTS ON FORM 8-K
There were no reports on Form 8-K during the quarter ended April 30, 1998.
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 5th day of June, 1998.
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
NUMBER DESCRIPTION
------- -----------
<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.)
4-E) Form S-8 Restricted Stock Grant Agreement (Exhibit 4.8 to
Veritas DGC Inc.'s Registration Statement No. 333-48953 dated
March 31, 1998 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.)
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
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.)
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.)
*27) Financial Data Schedule.
</TABLE>
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VERITAS
DGC INC.'S FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
<CASH> 92,511
<SECURITIES> 0
<RECEIVABLES> 143,520
<ALLOWANCES> 1,232
<INVENTORY> 3,498
<CURRENT-ASSETS> 257,425
<PP&E> 294,703
<DEPRECIATION> 141,569
<TOTAL-ASSETS> 474,634
<CURRENT-LIABILITIES> 105,756
<BONDS> 75,340
0
0
<COMMON> 211
<OTHER-SE> 283,694
<TOTAL-LIABILITY-AND-EQUITY> 474,634
<SALES> 0
<TOTAL-REVENUES> 388,565
<CGS> 0
<TOTAL-COSTS> 249,438
<OTHER-EXPENSES> 58,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,061
<INCOME-PRETAX> 81,066
<INCOME-TAX> 27,209
<INCOME-CONTINUING> 55,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,058
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VERITAS DGC
INC.'S FORM 10-Q FOR THE NINE MONTHS ENDED APRIL 30, 1998 (NINE MONTHS ENDED
APRIL 30, 1997 RESTATED FOR SFAS NO. 128) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 71,177
<SECURITIES> 0
<RECEIVABLES> 120,946
<ALLOWANCES> 646
<INVENTORY> 2,333
<CURRENT-ASSETS> 205,435
<PP&E> 240,758
<DEPRECIATION> 108,004
<TOTAL-ASSETS> 381,261
<CURRENT-LIABILITIES> 81,038
<BONDS> 75,588
0
0
<COMMON> 200
<OTHER-SE> 221,101
<TOTAL-LIABILITY-AND-EQUITY> 381,261
<SALES> 0
<TOTAL-REVENUES> 253,939
<CGS> 0
<TOTAL-COSTS> 189,646
<OTHER-EXPENSES> 43,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,334
<INCOME-PRETAX> 21,286
<INCOME-TAX> 4,260
<INCOME-CONTINUING> 17,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,761
<EPS-PRIMARY> .95
<EPS-DILUTED> .93
</TABLE>
