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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was $______________________ as of September 30,
1998.
The number of shares of the Company's common stock, $.01 par value, (the "Common
Stock"), outstanding at September 30, 1998 was 22,785,516 (including 1,506,863
Veritas Energy Services Inc. exchangeable shares which are identical to the
Common Stock in all material respects).
The registrant's proxy statement to be filed in connection with the registrant's
1998 Annual Meeting of Stockholders is incorporated by reference into Part III
of this report.
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TABLE OF CONTENTS
FORM 10-K
Item Page Number
---- -----------
PART I
1 Business
General 1
Industry Overview 1
Services and Markets 2
Technology and Capital Expenditures 6
Competition and Other Business Conditions 7
Backlog 7
Significant Customers 7
Employees 7
2 Properties 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters 9
6 Selected Consolidated Financial Data 10
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
8 Consolidated Financial Statements and Supplementary Data 15
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III
10 Directors and Executive Officers of the Registrant 44
11 Executive Compensation 44
12 Security Ownership of Certain Beneficial Owners and Management 44
13 Certain Relationships and Related Transactions 44
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
Signatures 48
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Unless the context otherwise requires, the number of shares, per share prices,
weighted average number of shares outstanding and per share amounts in this
report have been adjusted to reflect the August 30, 1996 business combination
(the "Combination") with Veritas Energy Services Inc. ("VES"). Unless the
context otherwise requires, all references to the "Company" are to Veritas DGC
Inc. and its subsidiaries and give effect to the consummation of the
Combination. Prior to the consummation of the Combination, the Company's name
was Digicon Inc. ("Digicon"). This report on Form 10-K 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 including those set forth under Item 1.
"Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a leading provider of seismic data acquisition, seismic data
processing, multi-client data sales and exploration and development information
services to the petroleum industry in selected markets worldwide. Oil and gas
companies utilize seismic data for the determination of suitable locations for
drilling exploratory wells and, increasingly, in reservoir management for the
development and production of oil and gas reserves. The Company acquires seismic
data in land, marsh, swamp and tidal ("transition zone") and marine environments
and processes data acquired by its own crews and crews of other operators. The
Company acquires seismic data both on an exclusive contractual basis for its
customers and on its own behalf for licensing to multiple customers on a
non-exclusive basis.
To increase its presence in the market for onshore geophysical services, in
August 1996 the Company completed the Combination with VES, a leading land
seismic contractor. Prior to the Combination, Digicon and VES had complementary
operations with no significant geographic overlap.
Prior to the Combination, the Company had initiated a comprehensive program
designed to refocus each of the Company's geographic and operational lines of
business. The Company's actions included: (i) selling its seismic equipment
manufacturing operations; (ii) selling its joint venture interests in the former
Soviet Union; (iii) deploying its land and transition zone crews and its marine
crews into markets where the Company's presence would be significant; (iv)
expanding its accumulation and sales of multi-client data to capitalize on the
historically higher margins associated with non-exclusive data; (v) emphasizing
research and development on its proprietary software in order to capitalize on
its reputation for seismic data processing innovation; and (vi) streamlining its
cost structure through personnel reduction, office consolidations, vessel
deactivations and the outsourcing of certain development and manufacturing
functions.
Beginning in fiscal 1997, the Company embarked upon an extensive capital
expenditure program designed to increase its efficiency and expand its
operations to improve the competitive position of its principal services and to
enable the Company to capitalize on high-growth/high-margin opportunities in
selected markets.
INDUSTRY OVERVIEW
Geophysical services enable oil and gas companies to determine whether
subsurface conditions are likely to be favorable for finding new oil and gas
accumulations and assist in determining the size and structure of previously
identified fields. These services consist of the acquisition and processing of
three dimensional ("3D") and two dimensional ("2D") seismic and other
geophysical data, which is used to produce computer-generated graphic images of
the subsurface strata. The resulting images are then analyzed and interpreted by
customers' geophysicists and are used by oil and gas companies in
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acquisition of new leases, selection of drilling locations on exploratory
prospects and reservoir development and management.
Geophysical data is acquired by land, transition zone and marine crews. In data
acquisition, a source of acoustical energy is employed at or below the earth's
surface and an acoustical wave is produced through the discharge of compressed
air, the detonation of small explosive charges, or other energy generating
techniques. As the acoustical wave travels through the earth, portions are
reflected by variations in the underlying rock layers, and the reflected energy
is captured by sensors situated at intervals along specified paths from the
point of acoustical impulse. The resulting signals are then converted to digital
data and transmitted to a recording unit. This data is then input into a
specialized data processing system that enhances the recorded signal by reducing
noise and distortion and improving resolution and arranges the input data to
produce, with the aid of plotting devices, an image of the subsurface strata. By
interpreting seismic data, oil and gas companies create detailed stratigraphic
maps of prospective areas and producing oil and gas reservoirs.
Three-dimensional surveys involve the acquisition of a very dense grid of
seismic data over a precisely defined area. This heavy concentration of data
requires extensive computer processing, involving the use of sophisticated
proprietary techniques, to produce an accurate image of the subsurface. Computer
analysis of the 3D survey data allows geophysicists to better examine and
interpret important subsurface features.
Over the last several years, worldwide demand for 3D surveys by major oil and
gas companies and independent producers has increased. The greater precision and
improved subsurface resolution obtainable from 3D seismic data have assisted
them in finding new fields and more accurately delineating existing fields, as
well as enhancing existing reservoir management and production monitoring
techniques. Enhanced subsurface resolution obtainable from 3D studies has been a
key factor in improving drilling success ratios and lowering finding and field
extension costs. This improved technology, coupled with advances in drilling and
completion techniques, is enhancing the industry's ability to find and develop
oil and gas reserves.
The industry is experiencing growing demand for 3D multi-client data surveys.
Increased leasing activity and the high costs of drilling exploration and
development wells have created significant demand for large-scale surveys
employing sophisticated data processing techniques. The relatively expensive
cost of acquiring and processing this data has prompted many oil and gas
companies to participate in multi-client data surveys to reduce their
geophysical expenses.
SERVICES AND MARKETS
The Company acquires seismic data in land, transition zone and marine
environments and processes data acquired from its own crews as well as data
acquired by other geophysical crews. The Company currently operates 13 land
crews, 3 transition zone crews and 9 marine crews in selected markets worldwide.
The Company also operates 20 seismic data processing facilities, located in
major oil and gas centers around the world. When performing geophysical services
under contract for oil and gas companies, the Company may be employed to acquire
and/or process geophysical data. Under these arrangements, the Company's entire
work-product belongs to the contracting party. The Company also acquires and
processes geophysical data for its own account, preserving its work-product in a
data library for later licensing on a non-exclusive basis. When acquiring data
for its library, the Company seeks pre-funding commitments for a large portion
of the cost of such surveys from multiple clients.
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The following tables set forth the Company's revenues by service group and
geographical area:
REVENUES BY SERVICE GROUP(1) Years Ended July 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Land and transition zone acquisition $229,754 $175,837 $117,667
Marine acquisition 85,852 64,429 54,360
Data processing 91,999 74,107 55,566
Data library sales 121,354 48,342 23,003
-------- -------- --------
Total $528,959 $362,715 $250,596
======== ======== ========
REVENUES BY GEOGRAPHICAL AREA Years Ended July 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
United States(2) $281,223 $184,013 $ 98,875
Canada 47,059 52,141 47,423
Latin America 93,494 51,157 36,346
Europe 51,089 42,798 37,394
Middle East 13,632 2,403
Asia Pacific 42,462 30,203 30,558
-------- -------- --------
Total $528,959 $362,715 $250,596
======== ======== ========
(1) Revenues from data acquisition and data processing services are recognized
based on contractual rates set forth in the related contract if the contract
provides a separate rate for each service provided. If the contract only
provides a rate for the overall service, revenues are recognized based on
the percentage of each service group's cost to total cost.
(2) Includes export sales of $458, $4,115 and $4,774 in fiscal 1998, 1997 and
1996, respectively.
In fiscal 1998, 1997 and 1996, 47%, 50% and 62%, respectively, of the Company's
revenues were attributable to international operations and export sales. See
Note 16 of Notes to Consolidated Financial Statements for additional
geographical information.
Geophysical services are marketed from the Company's corporate offices and from
its regional administrative centers by personnel whose duties also typically
include technical, supervisory or executive responsibilities. Contracts are
obtained either through competitive bidding in response to invitations for bids,
by direct negotiation with the prospective customer or through the initiation by
the Company of surveys for its data library, which surveys are then offered for
license on a non-exclusive basis.
Contracts for exclusive data acquisition involve payments on either a turnkey
method, time basis or on a combination of both methods. Under the turnkey
method, payments for services are based upon the amount of data collected or
processed, and the Company bears substantially all of the risk of business
interruption caused by inclement weather and other hazards. When operating on a
time basis, payments are based on agreed rates per unit of time, which may be
expressed in periods ranging from days to months, and certain risks of business
interruption (except for interruptions caused by failure of the Company's
equipment) are borne by the customer. When a combination of both turnkey and
time methods is used, the risk of business interruption is shared by the Company
and the customer. In each case, progress payments are usually required unless it
is expected that the job can be accomplished in a brief period. In recent years,
the Company's contracts for data acquisition have been predominately on a
turnkey or combination of turnkey/time basis. Substantially all exclusive data
processing work is done on a turnkey basis.
LAND AND TRANSITION ZONE ACQUISITION
The Company's land and transition zone acquisition services are performed with
seismic equipment using the latest technology. The equipment is capable of
collecting both 2D and 3D data, has a combined recording capacity of
approximately 31,000 channels and can be configured to operate up to 22 crews. A
majority of the Company's land and transition zone acquisition services involve
3D surveys. The
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Company is currently operating a total of 16 crews: eight in the United States,
two in Canada, two in Argentina, two in Bolivia, one in Oman and one in
Madagascar.
Each crew consists of: a surveying unit which lays out the lines to be recorded
and marks the site for shot-hole placement or equipment location; an explosive
or mechanical vibrating unit; and a recording unit that lays out the geophones
and recording instruments, directs shooting operations and records the
acoustical signal reflected from subsurface strata. On a typical land seismic
survey, the seismic crew is supported by several drill crews, which are
typically furnished by third parties under short-term contracts. Drill crews
operate in advance of the seismic crew and bore shallow holes for explosive
charges which, when detonated by the seismic crew, produce the necessary
acoustical impulse. In locations where the use of explosives is precluded due to
population density, technical requirements or ecological factors, a mechanical
vibrating unit or compressed air is substituted for explosives as the acoustical
source.
The Company uses helicopters to aid its crews in seismic data acquisition in
situations where such use will reduce overall costs and improve productivity. In
a helicopter supported project, seismic lines are cut approximately two meters
wide, compared to five meters wide when trucks are used to move cables,
geophones and personnel. The use of helicopters, which is often required in
areas with rugged terrain and in agricultural areas, results in better access
and reduced surface damage. In such a project, each seismic crew is typically
supported by one or two helicopters specifically suited to seismic acquisition
requirements.
MARINE ACQUISITION
Marine acquisition services are carried out by the Company's crews operating
from chartered vessels (except the Acadian Searcher which was purchased in
December 1997) which have been modified or equipped to the Company's
specifications. All of the vessels operated by the Company are equipped to
perform both 2D and 3D seismic surveys. During the last several years, a
majority of the marine seismic data acquisition services performed by the
Company involved 3D surveys. The following table sets forth certain information
concerning the geophysical vessels currently operated by the Company:
YEAR
ENTERED
VESSEL SERVICE LOCATION LENGTH BEAM
------------------- ------- ------------------ -------- -------
Acadian Searcher 1983 Offshore Australia 217 feet 44 feet
Ross Seal 1987 Offshore Cambodia 176 feet 38 feet
Polar Search 1992 Gulf of Mexico 300 feet 51 feet
Pearl Chouest 1995 Gulf of Mexico 210 feet 40 feet
Cape Romano 1996 Gulf of Mexico 155 feet 36 feet
Polar Princess 1996 Gulf of Mexico 250 feet 46 feet
Professor Kurentsov 1997 Offshore Canada 225 feet 41 feet
Seabulk Veritas 1997 Gulf of Mexico 194 feet 40 feet
Veritas Viking 1998 North Sea 305 feet 72 feet
The Polar Search, Polar Princess and Professor Kurentsov are chartered from a
ship operator for initial terms which expire in January 2000, February 2000 and
August 2001, respectively. The Veritas Viking is chartered from a ship owner on
an initial term which expires in June 2006. The Company's other vessels, are
operated under short-term charter arrangements expiring at various times through
1999. These charters contain certain options for the Company to extend terms at
rates closely approximating the expiring terms and rates. Decisions on whether
to extend the expiring vessel charters or enter into charters with other vessel
owners will be made prior to each charter expiration date.
Each vessel generally has an equipment complement consisting of seismic
recording instrumentation, digital seismic streamer cable, cable location and
seismic data location systems, multiple navigation systems, a source control
system which controls the synchronization of the energy source and a firing
system which generates the acoustical impulses. The streamer cable contains
hydrophones that receive the
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acoustical impulses reflected by variations in the subsurface strata. Data
acquired by each channel in the digital cable is partially processed before it
is transmitted to recording instruments for storage on magnetic media, thus
reducing subsequent processing time and the effective acquisition costs to the
customer.
At present, three of the Company's vessels are equipped with multiple streamers
and multiple energy sources, which acquire more lines of data with each pass,
reducing completion time and the effective acquisition cost. A three vessel,
multi-boat crew obtains similar benefits by recording the signals generated from
two source arrays on the master vessel with cables towed by each of the master
and two slave vessels. The Veritas Viking, the Company's largest vessel, was
added in fiscal 1998 and is capable of deploying more than 12 seismic streamer
cables. The Company has signed an eight-year charter for another large vessel to
join its fleet, which will be a sister ship to the Veritas Viking and is
expected to begin service in May 1999.
Each marine seismic crew consists of approximately 20 persons, excluding the
ship's captain and ship personnel. Seismic personnel live aboard the ship during
their tours of duty, which are staggered to permit continuous operations. During
seismic operations, the Company's personnel direct the positioning of the vessel
using sophisticated navigational equipment, deploy and retrieve the seismic
streamer cable and energy-source array, and operate all other systems relating
to data collection activities. The Company's personnel do not, however, have
ultimate responsibility for the vessel, which is operated by the captain and
personnel who are employees of the vessel owner.
DATA PROCESSING
The Company currently operates 20 seismic data processing centers capable of
processing 2D, 3D and four dimensional ("4D") data. A majority of the Company's
data processing services are performed on 3D seismic data. At each of the
centers, data received from the field, both from the Company and other
geophysical crews, is processed to produce an image of the earth's subsurface
using proprietary computer software and techniques developed by the Company. The
Company also reprocesses older seismic data using new techniques designed to
enhance the quality of the data. The Company's data processing centers have
opened at various times from 1966 through 1998 and are located in Houston (two
locations), Irving, Austin and Midland, Texas; Denver, Colorado; Oklahoma City,
Oklahoma; Santa Cruz, Bolivia; Singapore; Crawley, England; Calgary, Alberta,
Canada; Brisbane and Perth, Australia; Jakarta, Indonesia; Kuala Lumpur,
Malaysia; Buenos Aires and Neuquen, Argentina; Caracas, Venezuela; Quito,
Ecuador; and Abu Dhabi, U.A.E.
The Company's centers operate high capacity, advanced technology data processing
systems based on NEC, SUN SGI and HP computer systems with high-speed networks.
These systems utilize the Company's proprietary SEISMIC data processing
software. The marine and land data acquisition crews have software identical to
that utilized in the processing centers, allowing for ease in the movement of
data from the field to the data processing centers. The Company operates both
land and marine data processing centers and tailors the equipment and software
deployed in an area to meet the local market demands.
To improve its speed and capacity in processing large 3D and 4D surveys, the
Company installed a NEC supercomputer in its Houston processing center in early
fiscal 1997. The success of this first system led to the installation of a
second in the Crawley center in August 1997 and a third in Singapore in July
1998. These supercomputer installations act as global resources for all of the
Company's data processing operations.
DATA LIBRARY SALES
The Company often acquires and processes data for its own account. The Company
seeks pre-funding commitments from multiple customers for a large portion of the
cost of these surveys thereby lowering investment risk. In recent periods, the
Company has generally received commitments in excess of 70%,
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however future market conditions may impact these commitment levels. Once
acquired and processed, these surveys are then licensed for use to other
customers on a non-exclusive basis. Factors considered in determining whether to
undertake such surveys include the availability of initial participants to
underwrite a percentage of the costs, the location to be surveyed, the
probability and timing of future lease, concession and development activity in
the area and the availability, quality and price of competing data.
The relatively expensive cost of acquiring and processing seismic data has
prompted many oil and gas companies to participate in multi-client surveys to
reduce their geophysical expenses. In response to this increased demand, the
Company is adding to its data library, primarily in the Gulf of Mexico, the
North Atlantic Margin and Asia Pacific. While historically the Company's
multi-client data library has been offshore, the Company began adding onshore
surveys in Mississippi, Wyoming and Texas in fiscal 1997. As of July 31, 1998,
the Company's multi-client data library included approximately 1.8 million line
kilometers of survey data.
TECHNOLOGY AND CAPITAL EXPENDITURES
The geophysical industry is highly technical, and the requirements for the
acquisition and processing of seismic data have evolved continuously during the
past 50 years. Accordingly, it is of significance to the Company that its
technological capabilities are comparable or superior to those of its
competitors, whether through continuing research and development, strategic
alliances with equipment manufacturers or by acquiring technology under license
from others. The Company has introduced several technological innovations in its
geophysical service business that have become industry standard practice in both
acquisition and processing.
Currently, the Company employs approximately 59 persons in its research and
development activities, substantially all of whom are scientists, engineers or
programmers. During fiscal 1998, 1997 and 1996, research and development
expenditures were $6.2 million, $3.7 million, and $3.2 million, respectively.
The Company rarely applies for patents on internally developed technology. This
policy is based upon the belief that most proprietary technology, even where
regarded as patentable, can be more effectively protected by maintaining
confidentiality than through disclosure and a patent enforcement program.
Certain of the equipment, processes and techniques used by the Company are
subject to the patent rights of others, and the Company holds non-exclusive
licenses with respect to a number of such patents. While the Company regards as
beneficial its access to others' technology through licensing, the Company
believes that substantially all presently licensed technology could be replaced
without significant disruption to the business should the need arise.
The capital expenditure program for fiscal 1999 requires expenditures of
approximately $95.2 million, and another $8.2 million is budgeted for research
and development activities. The level of future capital expenditures will depend
on the availability of funding and market requirements as dictated by oil and
gas company activity levels.
The following table sets forth a summary of the Company's capital expenditures:
Years Ended July 31,
-------------------------------
1998 1997 1996
------- ------- -------
(In thousands of dollars)
Land and transition zone acquisition $29,207 $38,024 $15,020
Marine acquisition 43,599 34,482 7,757
Data processing 24,701 19,743 8,394
Other 2,042 3,801 1,689
------- ------- -------
Total $99,549 $96,050 $32,860
======= ======= =======
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COMPETITION AND OTHER BUSINESS CONDITIONS
The acquisition and processing of seismic data for the oil and gas exploration
industry has historically been highly competitive worldwide. As a result of
changing technology and increased capital requirements, the seismic industry has
consolidated substantially since the late 1980's. The largest competitors
remaining in the market are Western Geophysical (a division of Baker Hughes
Inc.), Geco-Prakla (a division of Schlumberger), Compagnie Generale Geophysique
and Petroleum Geo-Services ASA. Management believes the Company is the fifth
largest geophysical services company based on revenues. Competition for
available seismic surveys is based on several competitive factors, including
price, crew experience, equipment availability, technological expertise and
reputation for quality and dependability.
The Company's data acquisition activities often are conducted under extreme
weather and other hazardous conditions. Accordingly, these operations are
subject to risks of injury to personnel and loss of equipment. The Company
carries insurance against the destruction of, or damage to, its chartered
vessels, geophysical equipment and property and injury to persons that may
result from its operations and considers the amounts of such insurance to be
adequate. The Company may not be able to obtain insurance against certain risks
or for equipment located from time to time in certain areas of the world. The
Company obtains insurance against war, expropriation, confiscation and
nationalization when such insurance is available and when management considers
it advisable to do so. Such coverage is not always available and, when
available, is subject to unilateral cancellation by the insuring companies on
short notice. The Company also carries insurance against pollution hazards.
Fixed costs, including costs associated with vessel charters and operating
leases, labor costs, depreciation, and interest expense, account for a
substantial percentage of the Company's costs and expenses. As a result,
downtime or low productivity resulting from reduced demand, equipment failures,
weather interruptions or otherwise, can result in significant operating losses.
BACKLOG
At July 31, 1998, the Company's backlog of commitments for services was $299.8
million, compared with $257.3 million at July 31, 1997. It is anticipated that a
majority of the July 31, 1998 backlog will be completed in the next 12 months.
This backlog consists of written orders or commitments believed to be firm.
Contracts for services are occasionally varied or modified by mutual consent and
in certain instances are cancelable by the customer on short notice without
penalty. As a result of these factors, the Company's backlog as of any
particular date may not be indicative of the Company's actual operating results
for any succeeding fiscal period.
SIGNIFICANT CUSTOMERS
Historically, the Company's principal customers have been international oil and
gas companies, foreign national oil companies and independent oil and gas
companies. No single customer accounted for 10% or more of total revenues during
the years ended July 31, 1998, 1997 and 1996.
EMPLOYEES
At July 31, 1998, the Company had approximately 4,000 full-time employees. With
the exception of 351 unionized employees working at the Singapore data
processing center or on Argentina land crews, none of its employees are subject
to collective bargaining agreements. The Company considers the relations with
its employees to be good.
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ITEM 2. PROPERTIES
The Company's headquarters in Houston are located in a 12-story office building
and occupy approximately 106,000 square feet of leased premises. Approximately
38% of this space is devoted to data processing operations, and the balance
houses executive, accounting, research and development and geophysical operating
personnel. The Company leases additional space aggregating approximately 445,000
square feet which is used primarily for seismic data processing operations,
exploration and development information services, geophysical operating
personnel and warehousing in Austin, Galveston, Houston, Irving and Midland,
Texas; Denver, Colorado; New Iberia, Louisiana; Oklahoma City, Oklahoma; Buenos
Aires and Neuquen, Argentina; Brisbane and Perth, Australia; Santa Cruz,
Bolivia; Calgary, Alberta, Canada; Quito, Ecuador; Crawley, England; Kuala
Lumpur, Malaysia; Muscat, Oman; Singapore; Caracas, Venezuela; and Abu Dhabi,
U.A.E. These facilities are conventional office space, except for any
modifications in wiring, air conditioning and lighting necessary to accommodate
computer equipment. Leases covering the Company's facilities expire at varying
times from 1998 through 2013. The Company owns property in Jackson, Mississippi,
comprising 37,551 square feet of office and workshop facilities and in Calgary,
Alberta, Canada comprising 15,000 square feet of office space and maintenance
facilities. Additionally, the Company owns approximately two acres in Calgary,
Alberta, Canada used for equipment storage.
ITEM 3. LEGAL PROCEEDINGS
As of September 30, 1998, the Company was not a party to, nor was its property
the subject of any material pending legal proceedings, as defined by relevant
rules and regulations of the Securities and Exchange Commission.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended July 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock commenced trading on the New York Stock Exchange
under the symbol "VTS" on September 3, 1996. Prior to that time, the common
stock traded on the American Stock Exchange under the symbol "DGC". The
following table sets forth the reported high and low sales prices for the common
stock on the New York Stock Exchange and the American Stock Exchange, as
appropriate, for the periods shown.
Period High Low
----------- --------- ---------
1998 1st Quarter $ 50 1/8 $ 25
2nd Quarter 47 5/16 26 1/2
3rd Quarter 54 1/2 36
4th Quarter 60 7/8 30 7/16
1997 1st Quarter $ 21 1/2 $ 11 1/2
2nd Quarter 25 1/4 16 1/2
3rd Quarter 21 1/4 15 1/2
4th Quarter 26 5/8 18 1/8
On September 30, 1998, the last reported sale price of the Company's common
stock on the New York Stock Exchange was $16 11/16 per share. On September 30,
1998, the approximate number of holders of record of common stock was 131.
Historically, the Company has not paid any dividends on its common stock and has
no present plans to pay any dividends. The payment of any future dividends on
common stock would depend, among other things, upon the current and retained
earnings and financial condition of the Company and upon a determination by its
board of directors that the payment of dividends would be desirable. In
addition, the Company's senior notes due October 2003 limit the payment of
dividends. (See Note 4 of Notes to Consolidated Financial Statements.)
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data as of and
for each of the five years in the period ended July 31, 1998, which has been
restated for the Combination (see Note 2 of Notes to Consolidated Financial
Statements) which was accounted for as a pooling of interests. In addition,
earnings per share for the years ended July 31, 1995 and 1994 have been adjusted
to reflect a one-for-three reverse stock split effected in January 1995.
As a result of the differing year ends of Digicon and VES, results of operations
for dissimilar year ends have been combined. Digicon's results of operations for
fiscal years ended July 31, 1994 and 1995 have been combined with VES' results
of operations for fiscal years ended October 31, 1994 and 1995, respectively. To
conform year ends, Digicon's results of operations for the year ended July 31,
1996 have been combined with VES' results of operations for the twelve months
ended July 31, 1996. Accordingly, VES' operating results for the period August
1, 1995 through October 31, 1995 are included in the years ended July 31, 1995
and 1996. An adjustment in an amount equal to the results of operations for the
three-month period is included in the consolidated statements of changes in
stockholders' equity. VES' revenues, net income and earnings per share and
earnings per share assuming dilution were $22,150,000, $936,000 and $.05,
respectively, for the period August 1, 1995 through October 31, 1995.
Years Ended July 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues $ 528,959 $ 362,715 $ 250,596 $ 215,630 $ 178,392
Net income (loss) 66,958 25,125 1,281 5,594 (10,354)
Earnings (loss) per common share 2.96 1.33 .07 .31 (.66)
Earnings (loss) per common share -
assuming dilution 2.87 1.30 .07 .31 (.66)
As of July 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands of dollars)
BALANCE SHEET DATA:
Total assets $ 478,490 $ 385,089 $ 198,592 $ 184,340 $ 171,814
Long-term debt (including current
maturities) 75,561 75,971 41,090 36,788 31,104
10
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues. Revenues increased 46% from $362.7 million to $529.0 million during
the current year. Although all service groups improved, multi-client data
library sales showed the largest increase at 151%, from $48.4 million to $121.3
million. 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. Sales were mainly from marine surveys in the
deepwater Gulf of Mexico and North Atlantic Margin.
Land and transition zone acquisition revenues increased 31% from $175.8 million
to $229.8 million as a result of additional recording capacity, including the
purchase of equipment to configure up to two crews in Oman and the addition of
one crew in Latin America, and operating efficiencies from upgraded and
standardized equipment. Warmer than usual winter conditions, an extended spring
breakup period and a decrease in deep gas seismic activity in Canada had a
negative impact on revenues.
Marine acquisition revenues increased 33% from $64.4 million to $85.9 million
even though five vessels were in drydock approximately one month each for
regularly scheduled maintenance at various times during the year. The increase
was primarily due to additional streamer capacity and an increase in demand for
multi-client surveys, particularly in the Gulf of Mexico. In addition, the
Company chartered a new vessel beginning June 1998 that set Company production
records.
Data processing revenues increased 24% from $74.1 million to $92.0 million as a
result of increases in market activity, volume of data acquired in 3D surveys
and demand for computer intensive processes such as prestack time and depth
migration. The Company has substantially upgraded its processing centers,
including the addition of a second NEC supercomputer in Crawley, England and
several multi-noded workstations, to meet this increased demand.
Operating Expenses. Costs of services increased 28% from $271.7 million to
$346.9 million, but as a percent of revenues decreased from 75% to 66%. The
improvement in operating margins is mainly attributable to significant sales and
performance of multi-client data surveys that generally have higher margins.
Data processing operating margins also showed improvement due to more efficient
equipment. Land and transition zone margins remained consistent.
Depreciation and Amortization. Depreciation and amortization expense increased
38% from $40.6 million to $56.1 million due to the large increase in capital
expenditures over the past two years.
Selling, General and Administrative. Selling, general and administrative
expenses increased 65% from $11.4 million to $18.8 million resulting primarily
from the addition of staff to support the Company's expanded operations and
costs incurred in implementing new administrative and accounting systems and a
more aggressive marketing strategy.
Interest Expense. Interest expense includes an $800,000 reduction in the current
year for interest capitalized on the build out of the Company's newly chartered
vessel.
Other Income (Expense). Other income (expense) increased from a loss of $630,000
to income of $338,000 primarily from interest income earned on higher average
cash balances. This increase was offset by net foreign currency losses resulting
from fluctuations in foreign money markets.
Income Taxes. Provision for income taxes increased from $6.1 million to $34.2
million as a result of the Company's increased profitability. The effective tax
rate increased from 20% to 34% due to the write-off of certain of the Company's
investments in the prior year.
11
14
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues. For fiscal 1997, total revenues increased 45% from $250.6 million to
$362.7 million. Land and transition zone acquisition revenues increased 49% from
$117.6 million to $175.8 million as a result of higher demand, additional
capacity of 9,000 channels and operating efficiencies from upgraded and
standardized equipment. Demand improved significantly in Canada and remained
high during the spring break-up period. Contracts in the Company's other markets
had longer terms, larger channel requirements, better prices and improved
weather protection clauses.
Marine acquisition revenues increased 19% from $54.4 million to $64.4 million
primarily due to increased utilization of the Company's vessels, higher
productivity from the upgrade to Syntron equipment, the addition of the Polar
Princess in the first quarter and another short-term chartered vessel in the
fourth quarter.
Data processing operations increased 33% from $55.6 million to $74.1 million due
to increases in capacity, productivity and volumes of data available for
processing. The Company substantially upgraded its processing centers, installed
a NEC supercomputer in Houston and opened new centers in Abu Dhabi, Australia,
Ecuador and Oklahoma.
Multi-client data sales increased 110% from $23.0 million to $48.4 million due
to expanding customer interest in the Gulf of Mexico, especially deepwater and
sub-salt areas, and North Sea multi-client data surveys.
Operating Expenses. Costs of services increased 37% from $198.7 million to
$271.7 million, but as a percent of revenues decreased from 79% to 75%. The
improvement in operating margins is attributable to higher prices due to
increased market demand, better equipment utilization and higher productivity
for all service groups as discussed above.
Depreciation and Amortization. Depreciation and amortization expense increased
51% from $26.9 million to $40.6 million due to the extensive 1997 capital
expenditure program.
Selling, General and Administrative. Selling, general and administrative
expenses increased 57% from $7.3 million to $11.4 million, resulting primarily
from costs incurred in implementing new administrative and accounting systems,
pursuing a more aggressive marketing strategy and from incentive compensation as
a result of the Company's improved performance.
Interest. Interest expense increased 37% from $5.5 million to $7.5 million due
to increased debt levels required to finance the Company's 1997 capital
expenditure program. The Company issued $75 million of senior notes during the
year.
Merger Related Costs. Merger related costs consist primarily of one month of
investment banking and professional fees and expenses incurred in connection
with the Combination.
Income Taxes. Provision for income taxes increased from $2.0 million to $6.1
million as a result of the Company's increased profitability. However, the
effective tax rate was reduced in the current year by the write-off of certain
of the Company's investments.
Equity in (earnings) loss. Equity in (earnings) loss is related to the
Indonesian joint venture. An increase in marine acquisition surveys and the sale
of multi-client data library account for the increased profitability of the
joint venture in the current year.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES
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.
12
15
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 July 31, 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 1998, the Company obtained a new revolving credit facility due July 2001
from commercial lenders that provides advances up to $50.0 million. Advances are
limited by an unsecured borrowing base and bear interest, at the Company's
election, at LIBOR or prime rate plus a margin based on certain ratios
maintained by the Company. Currently, the borrowing base exceeds the maximum
commitment. Covenants in the agreement limit, among other things, the Company's
right to take certain actions, including creating indebtedness. In addition, the
agreement requires the Company to maintain certain financial ratios. The Company
is in compliance with all covenants of the agreement and there were no
outstanding advances as of July 31, 1998.
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. In
addition, receivables denominated in foreign currencies are subject to
fluctuations in foreign money markets. Approximately 47% of revenues for the
year ended July 31, 1998 were attributable to the Company's foreign operations.
The Company has also increased its participation in multi-client data surveys
and has significantly expanded its multi-client data library. 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 budget for fiscal 1999 is $95.2 million which includes
expenditures of $30.0 million to maintain or replace the Company's current
operating equipment and $65.2 million to expand capacity, including the
outfitting of a new marine seismic vessel. Research and development costs are
estimated at $8.2 million in fiscal 1999.
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, cash flow from operations, the unutilized portion of the
revolving credit facility and borrowings permitted under the Indenture and
revolving credit facility will provide sufficient liquidity to fund these
requirements through fiscal 1999. However, the Company's ability to meet its
obligations depends on its future performance, which, in turn, is subject to
general economic conditions, business and other factors beyond the Company's
control. For example, due to the continuing low price levels of crude oil,
exploration and production expenditures may experience some contraction during
1999, which may affect exploration budgets allocated to seismic expenditures. If
the Company is unable to generate sufficient cash flow from operations or
otherwise to comply with the terms of the revolving 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.
13
16
OTHER
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, including those used to support the Company's activities, such as
seismic data acquisition and processing equipment and accounting and payroll
systems. In the ordinary course of business, the Company has replaced a
significant amount of its hardware and software with Year 2000 compliant
systems. A replacement schedule has been prepared for its remaining
non-compliant systems and an ongoing monitoring program and contingency
procedures in the event of unanticipated non-compliance problems have been
established. The Company has also identified all external relationships, mainly
suppliers and customers, and mailed each entity an internally prepared
questionnaire regarding Year 2000 issues. Approximately 95% of the
questionnaires have been returned and indicate a state of readiness. The
remaining 5% do not pertain to critical systems. 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.
Since the Company's quasi-reorganization with respect to Digicon 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 year ended
July 31, 1998 the Company recognized $1.6 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. See Note 6 of Notes to
Consolidated Financial Statements.
The Company maintains operations in Europe, which are predominately conducted
from its U.K. offices. Although the U.K. has not currently elected to convert to
the new "euro" currency, the Company does have transactions with companies in
countries that will adopt the new currency. The Company has made a preliminary
assessment and does not anticipate any material effect to the financial
statements as a result of the new currency.
See Note 1 of Notes to Consolidated Financial Statements regarding new
accounting pronouncements not yet adopted.
14
17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Veritas DGC Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Veritas DGC Inc. and its subsidiaries at July 31, 1998 and 1997 and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
October 1, 1998
15
18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Veritas DGC Inc.
We have audited the consolidated statements of income, cash flows and changes in
stockholders' equity of Veritas DGC Inc. and subsidiaries for the year ended
July 31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audit. The consolidated financial
statements give retroactive effect to the merger of Digicon Inc. and Veritas
Energy Services Inc., which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements. We did not audit
the consolidated statements of income, cash flows and changes in stockholders'
equity of Veritas Energy Services Inc. for the year ended October 31, 1995 or
for the twelve months ended July 31, 1996, which statements reflect total
revenues of $109,996,000 for the year ended October 31, 1995 and $118,591,000
for the twelve months ended July 31, 1996. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Veritas Energy Services Inc. for 1995
and 1996, is based solely on the report of such other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations of Veritas DGC Inc. and
subsidiaries and its cash flows for the year ended July 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
October 10, 1996
16
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Veritas Energy Services Inc.
We have audited the consolidated statements of income, retained earnings and
changes in financial position of Veritas Energy Services Inc. for the nine
months ended July 31, 1996 and for the year ended October 31, 1995 (not
presented separately herein). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of operations of the Company and the changes in
its financial position for the nine months ended July 31, 1996 and for the year
ended October 31, 1995 in accordance with Canadian generally accepted accounting
principles.
PRICE WATERHOUSE
Chartered Accountants
Calgary, Alberta
September 20, 1996
17
20
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For the Years Ended July 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES $ 528,959 $ 362,715 $ 250,596
COSTS AND EXPENSES:
Cost of services 346,896 271,656 198,711
Write-off/write-down for impairment of assets 3,628
Depreciation and amortization 56,121 40,631 26,921
Selling, general and administrative 18,758 11,408 7,255
Other (income) expense:
Interest 7,318 7,484 5,466
Merger related costs 597 3,666
Other (338) 630 546
--------- --------- ---------
Total costs and expenses 428,755 332,406 246,193
--------- --------- ---------
Income before provision for income taxes and equity in 100,204 30,309 4,403
(earnings) loss of 50% or less-owned companies and
joint ventures
Provision for income taxes 34,218 6,062 2,009
Equity in (earnings) loss of 50% or less-owned companies
and joint ventures (972) (878) 1,113
--------- --------- ---------
NET INCOME $ 66,958 $ 25,125 $ 1,281
========= ========= =========
PER SHARE:
Earnings per common share $ 2.96 $ 1.33 $ .07
========= ========= =========
Weighted average common shares 22,594 18,898 17,882
========= ========= =========
Earnings per common share - assuming dilution $ 2.87 $ 1.30 $ .07
========= ========= =========
Weighted average common shares - assuming dilution 23,315 19,364 18,095
========= ========= =========
See Notes to Consolidated Financial Statements
18
21
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
July 31,
------------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 40,089 $ 71,177
Restricted cash investments 186 550
Accounts and notes receivable (net of allowance for doubtful accounts:
1998, $1,248; 1997, $646) 151,820 120,946
Materials and supplies inventory 4,106 2,333
Prepayments and other 16,290 10,429
--------- ---------
Total current assets 212,491 205,435
Property and equipment:
Seismic equipment 206,449 156,264
Data processing equipment 72,925 54,516
Seismic ship 7,534
Leasehold improvements and other 39,116 29,978
--------- ---------
Total 326,024 240,758
Less accumulated depreciation 151,104 108,004
--------- ---------
Property and equipment - net 174,920 132,754
Multi-client data library 51,143 20,904
Investment in and advances to joint ventures 2,943 2,908
Goodwill (net of accumulated amortization: 1998, $3,233; 1997, $2,725) 2,655 3,163
Deferred tax asset 19,157 10,213
Other assets 15,181 9,712
--------- ---------
Total $ 478,490 $ 385,089
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 289 $ 383
Accounts payable - trade 42,493 39,007
Accrued interest 2,234 2,188
Other accrued liabilities 50,753 38,669
Income taxes payable 10,682 3,486
--------- ---------
Total current liabilities 106,451 83,733
Non-current liabilities:
Long-term debt - less current maturities 75,272 75,588
Other non-current liabilities 5,071 4,467
--------- ---------
Total non-current liabilities 80,343 80,055
Commitments and contingent liabilities (See Note 8)
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:
21,278,653 and 19,982,040 shares (excluding 1,505,915 and 2,367,071
Exchangeable Shares, respectively) at July 31, 1998 and 1997,
respectively 213 200
Additional paid-in capital 202,512 194,764
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 94,358 27,400
Cumulative foreign currency translation adjustment (3,660) (1,063)
Less: Treasury stock, at cost; 50,000 shares at July 31, 1998 (1,727)
--------- ---------
Total stockholders' equity 291,696 221,301
--------- ---------
Total $ 478,490 $ 385,089
========= =========
See Notes to Consolidated Financial Statements
19
22
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
For the Years Ended July 31,
------------------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 66,958 $ 25,125 $ 1,281
Non-cash items included in net income:
Write-off/write-down for impairment of assets 3,628
Depreciation and amortization 56,121 40,631 26,921
Amortization of deferred gain on sale/leaseback (103)
Loss on disposition of property and equipment 1,549 1,151 875
Equity in (earnings) loss of 50% or less-owned companies and
joint ventures (972) (878) 1,113
Write-down of multi-client data library to market 689 2,604 1,774
Deferred taxes (7,314) (924)
Other 61
Change in operating assets/liabilities:
Accounts and notes receivable (30,874) (55,499) (9,466)
Materials and supplies inventory (1,773) (674) (241)
Prepayments and other (5,861) (2,230) (1,807)
Multi-client data library (30,928) 2,120 574
Other (5,598) (4,282) 851
Accounts payable - trade 1,043 11,003 952
Accrued interest 46 1,875 (96)
Other accrued liabilities 12,084 18,764 796
Income taxes payable 7,196 1,672 (227)
Other non-current liabilities 604 2,952 (1,541)
Adjustment to conform fiscal year of Veritas Energy Services Inc. (5,268)
--------- --------- ---------
Total cash provided by operating activities 62,970 43,410 20,077
FINANCING ACTIVITIES:
Payments of secured term loans (10,854)
Payments of long-term debt (410) (24,976) (11,437)
Borrowings from long-term debt 781 1,500
Net payments under credit agreements (11,458) (2,665)
Borrowings from senior notes 75,000
Debt issue costs (2,765)
Net proceeds from sale of common stock 6,131 80,515 4,470
(Purchase) sale of treasury stock (1,727) 3,972
--------- --------- ---------
Total cash provided (used) by financing activities 3,994 106,243 (4,160)
INVESTING ACTIVITIES:
(Increase) decrease in restricted cash investments 364 (223) 343
(Increase) decrease in investment in and advances to joint ventures 937 (567) (2,372)
Purchase of property and equipment (97,106) (89,112) (14,459)
Sale of property and equipment 221 1,037 668
--------- --------- ---------
Total cash used by investing activities (95,584) (88,865) (15,820)
Currency (gain) loss on foreign cash (2,468) 317 (107)
--------- --------- ---------
Change in cash and cash equivalents (31,088) 61,105 (10)
Beginning cash and cash equivalents balance 71,177 10,072 10,082
--------- --------- ---------
Ending cash and cash equivalents balance $ 40,089 $ 71,177 $ 10,072
========= ========= =========
See Notes to Consolidated Financial Statements
20
23
VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
For the Years Ended July 31,
---------------------------------
1998 1997 1996
------- ------- -------
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in property and equipment for:
Accounts and notes receivable - deferred credits utilized $ $ $ 866
Execution of equipment purchase obligations 6,388 16,963
Accounts payable - trade 2,443 550 572
Utilization of net operating losses existing prior to the
quasi-reorganization resulting in an increase (decrease) in:
Deferred tax asset valuation allowance (1,630) (9,867)
Additional paid-in capital 1,630 9,867
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest -
Senior notes 6,513 3,496
Equipment purchase obligations 113 673 1,878
Secured term loans 274 506
Credit agreements 53 403 1,843
Other 603 656 1,286
Income taxes 33,369 1,891 5,086
See Notes to Consolidated Financial Statements
21
24
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
(In thousands of dollars)
Accumulated
Treasury Stock, Earnings Cumulative
Common Stock Issued At Cost (from August 1, Foreign
---------------------- ---------------------- Additional 1991 with Currency
Par Paid-In respect Translation
Shares Value Shares Amount Capital to Digicon Inc.) Adjustment
-------------- ------- ----------- --------- ----------- ----------------- -------------
BALANCE, JULY 31, 1995 11,134,939 $ 111 (858,497) $ (4,772) $ 100,797 $ 1,930 $ (66)
Treasury stock issued for cash,
net of issue costs 858,497 4,772 (800)
Common stock issued for cash
upon exercise of warrants 29,433 530
Common stock issued for cash
under employee stock option
plan 181,497 2 2,448
Common stock certificates
cancelled (11,517)
Registration and filing costs (30)
Exchangeable stock issued for
cash under employee stock
purchase plan -Veritas Energy
Services Inc. 12
Exchangeable stock issued for
cash under employee stock
option plan -Veritas Energy
Services Inc. 1,512
Cumulative foreign currency
translation adjustment (868)
Net income 1,281
Adjustment to conform fiscal
year of Veritas Energy
Services Inc. (936)
-------------- ------- ----------- --------- ----------- ----------------- -------------
BALANCE, JULY 31, 1996 11,334,352 113 104,469 2,275 (934)
Common stock issued for
exchangeable stock 4,645,968 47 (47)
Common stock issued for cash
upon exercise of warrants 191,333 2 1,029
Common stock issued for cash
under employee stock option
plan 360,387 3 3,121
Common stock issued for cash,
net of issue costs 3,450,000 35 76,416
Registration and filing costs (91)
Utilization of net operating
loss carryforwards existing
prior to quasi-reorganization 9,867
Cumulative foreign currency
translation adjustment (129)
Net income 25,125
-------------- ------- ----------- --------- ----------- ----------------- -------------
BALANCE, JULY 31, 1997 19,982,040 200 194,764 27,400 (1,063)
Common stock issued for
exchangeable stock 871,818 9 (9)
Common stock issued for cash
upon exercise of warrants 42,000 189
Common stock issued for cash
under employee stock option
plan 326,731 3 3,925
Common stock issued for services
under restricted stock
agreements 3,333 169
Common stock issued for cash
under employee stock purchase
plan 52,731 1 1,864
Common stock reacquired for
cash, including fees (50,000) (1,727)
Registration and filing costs (20)
Utilization of net operating
loss carryforwards existing
prior to quasi-reorganization 1,630
Cumulative foreign currency
transaction adjustment (2,597)
Net income 66,958
-------------- ------- ----------- --------- ------------ ----------------- -------------
BALANCE, JULY 31, 1998 21,278,653 $ 213 (50,000) $ (1,727) $ 202,512 $ 94,358 $ (3,660)
============== ======= =========== ========= ============ ================= =============
See Notes to Consolidated Financial Statements
22
25
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
Veritas DGC Inc. (the "Company") provides seismic data acquisition, data
processing, multi-client data sales and exploration and development information
services to the petroleum industry in selected markets worldwide. The
accompanying consolidated financial statements include the accounts of Veritas
DGC Inc., formerly Digicon Inc. ("Digicon"), and all majority-owned domestic and
foreign subsidiaries. Investments in 50% or less-owned companies and joint
ventures are accounted for on the equity method. All material intercompany
balances and transactions have been eliminated. All financial information for
all periods presented prior to the merger on August 30, 1996 between Digicon and
Veritas Energy Services Inc. ("VES") includes the results of VES. (See Note 2.)
The merger has been accounted for as a pooling of interests. Digicon effected a
quasi-reorganization adjustment as of July 31, 1991 in which its accumulated
deficit at July 31, 1991 of $139,751,000 was offset against additional paid-in
capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain prior year balances have been reclassified for consistent presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and short-term investments,
restricted cash investments, accounts and notes receivable, accounts payable and
debt. The fair market value of the $75.0 million senior notes included in
long-term debt and $2.2 million of related accrued interest is $78.5 million
based on the present value of total payments due at the high yield corporate
bond rate at July 31, 1998. The carrying value is a reasonable estimate of fair
value for all other instruments.
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 annual and interim 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.
23
26
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
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'
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.
TRANSLATION OF FOREIGN CURRENCIES
The Company has determined that the United States ("U.S.") dollar is its primary
functional currency and, accordingly, most foreign entities translate property
and equipment (and related depreciation) and inventories into U.S. dollars at
the exchange rate in effect at the time of their acquisition while other assets
and liabilities are translated at year-end rates. Operating results (other than
depreciation) are translated at the average rates of exchange prevailing during
the year. The remaining foreign entities use the Canadian dollar as their
functional currency and translate all assets and liabilities at year-end
exchange rates and operating results at average exchange rates prevailing during
the year. Adjustments resulting from the translation of assets and liabilities
are recorded in the cumulative foreign currency translation adjustment account
in stockholders' equity. Remeasurement gains and losses are included in the
determination of net income and are reflected in other costs and expenses. (See
Note 13.)
CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company has
defined "cash equivalents" as items readily convertible into known amounts of
cash with original maturities of three months or less.
RESTRICTED CASH INVESTMENTS
Restricted cash investments in the amounts of $186,000 and $550,000 at July 31,
1998 and 1997, respectively, were pledged as collateral on certain bank
guarantees related to contracts entered into in the normal course of business.
ACCOUNTS RECEIVABLE
Included in accounts and notes receivable at July 31, 1998 and 1997 are unbilled
amounts of approximately $43,058,000 and $17,308,000, respectively. Such amounts
are either not billable to the customer at July 31 in accordance with the
provisions of the contract and generally will be billed in one to four months or
are currently billable and will be invoiced in the next monthly statement cycle.
24
27
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
INVENTORIES
Inventories of materials and supplies are stated at the lower of average cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method based on estimated useful lives as follows:
Estimated Useful
Life
----------------
Seismic equipment 3-5
Data processing equipment 3
Seismic ship 5
Leasehold improvements and other 3-10
Expenditures for routine repairs and maintenance are charged to expense as
incurred; expenditures for additions and improvements, including capitalized
interest, are capitalized and depreciated over the estimated useful life of the
related asset. The net gain or loss on property and equipment disposed of is
included in other costs and expenses. (See Note 13.)
In fiscal 1996, the Company recognized impairment of assets in the amount of
$3,628,000 or $.20 per common share and per common share - assuming dilution.
(See Note 12.)
MULTI-CLIENT DATA LIBRARY
The Company collects and processes certain seismic data for its own account to
which it retains all ownership rights and which it resells to clients on a
non-transferable, non-exclusive basis. The Company may obtain precommitted sales
contracts to help fund the cash requirements of these surveys which generally
last from five to seven months. The Company capitalizes associated costs using
an estimated sales method. Under that method the amount capitalized equals
actual costs incurred less costs attributed to the precommitted sales contracts
based on the percentage of total estimated costs to total estimated sales
multiplied by actual sales. The capitalized cost of multi-client data library is
likewise charged to operations in the period subsequent sales occur based on the
percentage of total estimated costs to total estimated sales multiplied by
actual sales. Beginning in fiscal 1997, the Company changed the estimated life
of its multi-client data library so that any costs remaining 24 months after
completion of a survey are charged to operations over a period not to exceed 24
months. The Company periodically reviews the carrying value of the multi-client
data library to assess whether there has been a permanent impairment of value
and records losses when the total estimated costs exceed total estimated sales
or when it is determined that estimated sales would not be sufficient to cover
the carrying value of the asset.
GOODWILL
The Company records the purchase price of businesses or joint venture interests
in excess of the fair value of net assets acquired as goodwill which is
amortized using the straight-line method over a period of 10 to 20 years which
approximates the period benefits are expected to be derived. The Company
periodically reviews the carrying value of goodwill in relation to the current
and expected operating results of the businesses or joint ventures in order to
assess whether there has been a permanent impairment of such amounts.
25
28
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
MOBILIZATION COST
Transportation and make-ready expenses of seismic operations incurred prior to
commencement of business in an area, that would not have been incurred
otherwise, are deferred and amortized over the lesser of the term of the related
contract or backlog of contracts in that area or one year. Amounts applicable to
operations for the Company's own account are included in the cost of the
multi-client data library. Unamortized mobilization costs are shown as other
assets and totaled $818,000 at July 31, 1998. There were no unamortized
mobilization costs at July 31, 1997.
LEASES
Operating leases include those for office space, specialized seismic equipment
rented for short periods of time, and the Company's seismic ships which
generally are chartered on a short-term basis.
REVENUES
Revenues from data acquisition and data processing services are recognized on
the percentage-of-completion method measured by the amount of data collected or
processed to the total amount of data to be collected or processed or by time
incurred to total time expected to be incurred. Sales from the licensing of
multi-client data surveys are recognized upon delivery of such data based upon
agreed rates set forth in the contract.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense when incurred. Research
and development costs for the years ended July 31, 1998, 1997 and 1996 were
$6,196,000, $3,725,000 and $3,193,000, respectively.
STOCK-BASED COMPENSATION
The Company maintains stock-based compensation plans that are accounted for
using the intrinsic value based method allowed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Under that method, compensation expense is recorded in the
accompanying consolidated financial statements when the quoted market price of
stock at the grant date or other measurement date exceeds the amount an employee
must pay to acquire the stock. As required by SFAS No. 123, "Accounting for
Stock-Based Compensation," the effect on net income and earnings per share of
compensation expense that would have been recorded using the fair value based
method is reported through disclosure. (See Note 9.)
EARNINGS PER SHARE
All per share amounts contained herein have been restated in accordance with
SFAS No. 128, "Earnings per Share," which became effective for interim and
annual reporting periods ending after December 15, 1997. This statement requires
the computation of earnings per share based upon weighted average common shares
outstanding and earnings per share - assuming dilution 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. (See Note 14.)
26
29
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
2. BUSINESS COMBINATION
Veritas DGC Inc. was formerly named Digicon Inc. ("Digicon"). On August 30,
1996, Digicon and Veritas Energy Services Inc. ("VES"), a Canadian company,
consummated a business combination (the "Combination"). VES became a wholly
owned subsidiary of Digicon and Digicon changed its name to Veritas DGC Inc.
(the "Company"). As a result of the Combination, each share of VES no par value
common shares outstanding was converted into the right to receive VES no par
value exchangeable stock (the "Exchangeable Stock") at an exchange ratio of 0.8
of a share of Exchangeable Stock per VES common share. All of the holders of VES
common shares, except for those shareholders who perfected and properly
exercised their right to dissent from the Combination and received fair value of
their shares in cash, became holders of Exchangeable Stock and accordingly,
7,023,701 shares of Exchangeable Stock were issued. The aggregate stated capital
of the Exchangeable Stock is equal to the aggregate stated capital immediately
prior to the Combination of the VES common shares that were exchanged or
approximately $30.0 million. The Exchangeable Stock is convertible, at the
discretion of the stockholder, on a one-for-one basis into shares of the
Company's $0.01 par value common stock and their holders have rights identical
to the holders of the Company's common stock. Options to purchase shares of VES
common stock ("VES Option") were converted into options to purchase shares of
the Company's common stock at an exchange ratio of 0.8 of an option in the
Company's common stock per VES Option. (See Note 9.) The VES articles of
amalgamation were amended to reduce the number of authorized VES common shares
to one which is held by the Company.
The Combination has been accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements have been
prepared on a basis that includes the accounts of Digicon and VES. Information
concerning common stock and per share data has been restated on an equivalent
share basis. As a result of the differing year ends of Digicon and VES, results
of operations for dissimilar year ends have been combined. Digicon's results of
operations for the year ended July 31, 1995 have been combined with VES' results
of operations for the year ended October 31, 1995. To conform year ends,
Digicon's results of operations for the year ended July 31, 1996 have been
combined with VES' results of operations for the twelve months ended July 31,
1996 and, accordingly, VES' operating results for the period August 1,1995
through October 31, 1995 are included in the years ended July 31, 1995 and July
31, 1996. An adjustment in an amount equal to the results of operations for this
three-month period is included in the consolidated statements of changes in
stockholders' equity. VES' revenues, net income, and earnings per share and
earnings per share - assuming dilution were $22,150,000, $936,000 and $0.05,
respectively, for the period August 1, 1995 through October 31, 1995.
27
30
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
Presented below is the effect of the pooling of interests on previously reported
results of operations for the year ended July 31, 1996. Amounts related to VES
have been converted into the Company's reporting currency, U.S. dollars, using
weighted average exchange rates prevailing during the period and reflect
adjustments for differences between U.S. and Canadian generally accepted
accounting principles ("GAAP") and reclassifications to conform financial
statement presentation. Canadian to U.S. GAAP adjustments include adjustments to
(i) write off foreign exchange losses on borrowings which are deferred and
amortized over the period of the debt, decreasing net income by approximately
$173,000 and (ii) reverse the effect of a prior period adjustment, increasing
net income by approximately $102,000. Reclassification of $28,842,000 has been
made to net amounts billed to customers for reimbursable costs against VES'
revenues.
For the Year Ended July 31, 1996
--------------------------------
Revenues Net Income
---------- -------------
(In thousands of dollars)
Digicon $ 160,847 $ 385
VES 118,591 967
Reclassifications (28,842)
Adjustments (71)
--------- ---------
Total $ 250,596 $ 1,281
========= =========
The Company's earnings per share and earnings per share - assuming dilution as
previously reported was $0.03 and its earnings per share and earnings per share
- -assuming dilution as restated is $0.07.
There were no material adjustments to the net assets of VES as a result of
adopting the same accounting principles as the Company.
During the year ended July 31, 1997 and 1996, the Company incurred and expensed
$597,000 and $3,666,000, respectively, of costs associated with the Combination.
These costs consist primarily of professional fees and include $150,000 payable
to a stockholder who was the former Chairman of the Board of Directors for
consulting services rendered in conjunction with the Combination.
3. 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:
July 31,
-------------------------
1998 1997
-------- --------
(In thousands of dollars)
Current assets $ 2,740 $ 3,697
Property and equipment, net 613 60
Multi-client data library 228
-------- --------
Total assets $ 3,353 $ 3,985
======== ========
Current liabilities $ 410 $ 1,077
Advances from affiliates 13,847 14,784
Stockholders' deficit:
Common stock 2,576 2,576
Accumulated deficit (13,480) (14,452)
-------- --------
Total stockholders' deficit (10,904) (11,876)
-------- --------
Total liabilities and stockholders' deficit $ 3,353 $ 3,985
======== ========
28
31
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
For the Years Ended July 31,
---------------------------------------
1998 1997 1996
------- ------- -------
(In thousands of dollars)
Revenues $ 3,346 $ 7,240 $ 2,927
Cost and expenses:
Cost of services 2,378 6,424 3,429
Depreciation and amortization 316
Other (320) (62) (15)
------- ------- -------
Total 2,374 6,362 3,414
------- ------- -------
Income (loss) before provision for income taxes 972 878 (487)
Provision for income taxes 166
------- ------- -------
Net income (loss) $ 972 $ 878 $ (653)
======= ======= =======
4. LONG-TERM DEBT
The Company's long-term debt is as follows:
July 31,
-------------------------
1998 1997
------- ----------
(In thousands of dollars)
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 July 31, 1998 561 971
------- -------
Total 75,561 75,971
Less current maturities 289 383
------- -------
Due after one year $75,272 $75,588
======= =======
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 maintained a revolving credit agreement which matured in July 1998
with a commercial bank that provided advances up to $25.0 million of which $20.0
million were secured by substantially all of the receivables of the Company.
Advances bore interest, at the Company's election, at LIBOR plus two percent or
prime rate and were defined by a borrowing formula. In July 1998, the Company
obtained a new revolving credit agreement due July 2001 with commercial lenders
to provide advances up to $50.0 million. Advances are limited by an unsecured
borrowing base and bear interest, at the Company's election, at LIBOR or prime
rate (8.5% at July 31, 1998) plus a margin based on certain ratios maintained by
the Company. Covenants in the agreement limit, among other things, the Company's
right to take certain actions, including creating indebtedness. In addition, the
agreement requires the Company to maintain certain financial ratios. No advances
were outstanding at July 31, 1998 and 1997 under the credit agreements.
29
32
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
The Company's equipment purchase obligations represent installment loans and
capitalized lease obligations primarily related to computer and seismic
equipment.
Annual maturities of long-term debt for the next five years are as follows:
Annual
Fiscal Year Maturities
----------- -------------
(In thousands
of dollars)
1999 $ 289
2000 240
2001 32
2004 75,000
=======
Total $75,561
=======
During the year ended July 31, 1998, the Company incurred interest costs of
$8,118,000. The Company capitalized $800,000 of this amount as a cost of
leasehold improvements to a chartered vessel. No interest was capitalized during
the years ended July 31, 1997 and 1996.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities included $12,216,000 and $8,313,000 of accrued payroll
and benefits and $19,196,000 and $14,263,000 of deferred revenues at July 31,
1998 and 1997, respectively.
6. INCOME TAXES
Pretax income was taxed under the following jurisdictions:
For the Years Ended July 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
U.S. $ 90,690 $ 21,098 $ 9,457
Foreign 9,514 9,211 (5,054)
-------- -------- --------
Total $100,204 $ 30,309 $ 4,403
======== ======== ========
The provision for income taxes consists of the following:
For the Years Ended July 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Current - U.S. $ 36,616 $ 3,352 $ 192
Deferred - U.S. (5,469) (2,940) 395
Current - Foreign 4,952 3,634 2,555
Deferred - Foreign (1,881) 2,016 (1,133)
-------- -------- --------
Total $ 34,218 $ 6,062 $ 2,009
======== ======== ========
30
33
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
A reconciliation of income tax expense computed at the U.S. statutory rate to
the provision reported in the consolidated statements of income is as follows:
For the Years Ended July 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
(In thousands of dollars)
Income tax at the statutory rate $ 35,071 $ 10,608 $ 1,541
Increase (reduction) in taxes resulting from:
Foreign earnings taxed at other than the U.S.
statutory rate (1,349) 1,806 (131)
Write-off of investment (6,300) (4,734)
Contingency 1,036 2,327
Foreign losses with no tax recovery 4,985
Foreign tax credit (3,465)
U.S. tax on Subpart F income and dividends 1,685
Employee Nonqualified Stock Option Plan deduction (1,375)
U.S. tax on branch operations 2,567 501
Prior year tax return to tax provision reconciliation (1,708) (3,826)
Other 1,756 946 348
-------- -------- --------
Total $ 34,218 $ 6,062 $ 2,009
======== ======== ========
Deferred taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes. The primary
components of the Company's deferred tax assets and liabilities are as follows:
July 31,
-------------------------
1998 1997
-------- --------
(In thousands of dollars)
Deferred tax assets:
Difference between book and tax basis of property and equipment $ 4,067 $ 1,713
Difference between book and tax basis of multi-client data library 20,402 13,871
Net operating loss carryforwards 36,111 37,539
Tax credit carryforwards 334 1,629
Other (693) (630)
-------- --------
Total 60,221 54,122
Deferred tax liabilities (259) (1,425)
-------- --------
Net deferred tax asset 59,962 52,697
Valuation allowance (40,805) (42,484)
-------- --------
Net deferred tax asset $ 19,157 $ 10,213
======== ========
A valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The valuation
allowance is then adjusted when the realization of deferred tax assets becomes
more likely than not. Adjustments are also made to recognize the expiration of
net operating loss and investment tax credit carryforwards, with equal and
offsetting adjustments to the related deferred tax asset. Should the Company's
income projections result in the conclusion that realization of additional
deferred tax assets is more likely than not, further adjustments to the
valuation allowance are made. Since the Company's quasi-reorganization with
respect to Digicon 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. The net reduction of approximately $1,679,000 in the
valuation allowance during the current period resulted primarily from
recognition of the expected utilization of net operating loss carryforwards
generated prior to the quasi-reorganization and the expiration of investment tax
credits.
As of July 31, 1998, the Company has U.S. net operating loss carryforwards of
approximately $77,964,000 and investment tax credit carryforwards of
approximately $334,000. Approximately
31
34
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
$53,421,000 of net operating loss carryforwards and all of the investment tax
credit carryforwards existed prior to the quasi-reorganization. The following
schedule sets forth the expiration dates of the U.S. net operating loss and
investment tax credit carryforwards:
U.S. Net Investment
Fiscal Year Operating Loss Tax Credit
----------- ---------------- ----------
(In thousands of dollars)
1999 $ 2,209 $ 315
2000 9,406 19
2001 30,032
2003 4,222
2004 6,355
2005 1,198
2006 1,347
2007 2,505
2009 7,994
2010 2,710
2011 9,986
------- -------
Total $77,964 $ 334
======= =======
Internal Revenue Service regulations restrict the utilization of U.S. net
operating loss carryforwards and other tax benefits (such as investment tax
credits) for any company in which an "ownership change" (as defined in Section
382 of the Internal Revenue Code) has occurred. The Company has performed the
required testing and has concluded that two "ownership changes" have occurred.
The first occurred in connection with the issuance of common stock through a
public offering made by the Company on January 6, 1992. The utilization of U.S.
net operating loss carryforwards existing at the date of the first "ownership
change" is limited to approximately $4,041,000 per year. The second "ownership
change" occurred on August 30, 1996 as a result of the stock acquisition of
Veritas Energy Services Inc. The utilization of U.S. net operating losses
incurred between the first and second ownership changes is limited to
approximately $8,875,000 per year, which includes the limitation of
approximately $4,041,000 from the first ownership change. The second limitation
also applies to the limitation from the first ownership change that accumulated
during the periods between the first and second ownership changes. During the
years ended July 31, 1998 and 1997, the Company utilized approximately
$8,875,000 and $10,983,000 of limitation carryover, respectively. As of July 31,
1998, approximately $11,492,000 of unused limitation carryover remained.
Foreign operations had net operating loss carryforwards of approximately
$25,187,000 at July 31, 1998, of which approximately $14,385,000 existed prior
to the quasi-reorganization. Approximately $16,677,000 of the total foreign net
operating loss carryforwards are related to United Kingdom operations, have an
indefinite carryforward period, and are available to offset future profits in
the Company's current trade or business. Approximately $13,312,000 of the United
Kingdom net operating loss carryforwards existed prior to the
quasi-reorganization. Approximately $4,186,000 of the total foreign net
operating loss carryforwards are related to Oman operations, were generated
after the quasi-reorganization and have a carryforward period of five years.
The Company considers the undistributed earnings of its foreign subsidiaries to
be permanently reinvested. The Company has not provided deferred U.S. income tax
on those earnings, as it is not practicable to estimate the amount of additional
tax that might be payable should these earnings be remitted or deemed remitted
as dividends or if the Company should sell its stock in the subsidiaries.
32
35
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
7. DEFERRED CREDITS
In August 1992, the Company entered into agreements with a customer pursuant to
which the Company received certain seismic equipment with a fair value of
approximately $1,792,000 and was obligated to allow $7,800,000 in discounts at
specified rates on future seismic services performed by the Company for such
customer. The Company recorded deferred revenue equal to the fair value of
seismic equipment at the time the equipment was received. The deferred revenue
is amortized as an adjustment to revenues at a rate determined by the ratio of
revenues generated by the customer during a reporting period to total revenues
estimated to be generated by the customer under the agreements. Revenues are
recognized net of discounts allowed as the customer purchases seismic services
eligible for the discounts. At July 31, 1998, there was no remaining
unrecognized deferred revenue and remaining discounts in the amount of
$1,847,000 were available to such customer.
The Company also has $585,000 and $5,022,000 at July 31, 1998 and 1997,
respectively, included in accounts payable-trade relating to deferred credits
earned by certain customers in conjunction with their original participation in
certain of the Company's multi-client data surveys. These credits may be applied
by the customers against future invoiced amounts.
8. COMMITMENTS AND CONTINGENT LIABILITIES
Total rentals of vessels, equipment and office facilities charged to operations
amounted to $57,476,000, $37,332,000 and $28,210,000 for the years ended July
31, 1998, 1997 and 1996, respectively.
Minimum rentals payable under operating leases, principally for office space and
vessel charters with remaining noncancellable terms of at least one year are as
follows:
Fiscal Year Minimum Rentals
----------- -------------------------
(In thousands of dollars)
1999 $37,636
2000 25,214
2001 13,081
2002 10,066
2003 9,988
2004-2013 27,544
In connection with the Company's 1999 capital expenditure program, the Company
has commitments of approximately $3,000,000 outstanding at July 31, 1998.
On November 25, 1997, the Company entered into a 96-month charter agreement for
a vessel which is being constructed by a shipbuilder for the owner. The charter
is noncancellable unless the owner exercises its right to cancel the
shipbuilding contract due to late delivery (in excess of 180 days of the
scheduled delivery time of May 1999).
The Company has an employment agreement with a former employee, who was also a
director, that contains a non-compete clause for a period of three years ending
December 31, 1998 during which time the former employee will receive payments of
$12,709 per month plus certain employee benefits.
During 1993 the Company purchased occurrence-based workers compensation
insurance. The policies for the years ended August 31, 1998 and 1997 were issued
under a guaranteed cost program and, accordingly, there were no deductibles. The
policy for the year ended August 31, 1996 provided for a maximum deductible of
$1,000,000. Management has evaluated the adequacy of the accrual for the
liability for incurred but unreported workers compensation claims and has
determined that the ultimate
33
36
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
resolution of any such claims would not have a material adverse impact on the
financial position of the Company. The Company has letters of credit in the
amount of $4,150,000 at July 31,1998 that will expire upon the completion of
certain events relating to specific contracts.
9. EMPLOYEE BENEFITS
The Company maintains a 401(k) plan in which employees of the Company's
majority-owned domestic subsidiaries and certain foreign subsidiaries are
eligible to participate. However, employees of foreign subsidiaries who are
covered under a foreign deferred compensation plan are not eligible. Employees
are permitted to make contributions of up to 10% of their salary to a maximum of
$9,500 per year. Generally, the Company will contribute an amount equal to
one-half of the employee's contribution of up to $8,000 or 8% of the employee's
salary (whichever is less); however, if consolidated pre-tax income for any
fiscal year is less than the amount required to be contributed by the Company,
the Company may elect to reduce its contribution, but in no event may it reduce
the total contribution to less than 25% of the employee contribution. The
Company may make additional contributions from its current or cumulative net
profits in an amount to be determined by the Board of Directors. The Company's
matching contributions to the 401(k) plan were $679,000 in 1998, $426,000 in
1997, and $314,000 in 1996.
The Company has an employee nonqualified stock option plan under which options
are granted to officers and key employees. Options generally vest over a period
of time and are exercisable over a ten-year period but may not be exercised
earlier than six months after the grant date. The exercise price for each option
shall not be less than the lesser of (i) the fair market value of the common
stock on the grant date or (ii) the average fair market value of the common
stock during the 30 trading days ending on the trading day next preceding the
grant date. The Company has authorized 1,158,333 shares of common stock to be
issued under the plan.
The Company also has a stock option plan for non-employee directors (the
"Director Plan") under which options are granted to non-employee directors of
the Company. The Director Plan provides that every other year each eligible
director shall be granted options to purchase 10,000 shares of the Company's
common stock. Options vest ratably over four years on the anniversary of the
grant date and are exercisable over ten years. The exercise price for each
option granted is fair market value, as defined. The Company has authorized
600,000 shares of common stock to be issued under the Director Plan.
34
37
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
At the date of Combination (see Note 2), options to purchase VES Common Stock
("VES Option") were converted into options to purchase shares of the Company's
common stock at an exchange ratio of 0.8 of an option in the Company's common
stock per VES Option. All options are immediately exercisable and expire at
varying times through November 2005.
For the Year Ended July 31, 1998
--------------------------------------------------------------
Weighted Weighted
Weighted Average Grant Average
Number of Average Date Fair Contractual
Shares Exercise Price Value Life
---------- -------------- ------------- -----------
Beginning balance 1,276,364 $ 15.18
Options granted 133,426 $ 30.95
Options exercised (326,733) $ 11.94
Options forfeited (60,518) $ 19.78
---------
Ending balance 1,022,539 $ 18.00
=========
Options exercisable 366,482 $ 12.38
=========
Options granted by range of exercise price:
Exercise price less than market price 5,954 $ 38.30 $ 39.56
Exercise price equal to market price 125,444 $ 30.32 $ 30.32
Exercise price more than market price 2,028 $ 48.31 $ 47.57
---------
133,426
=========
Ending balance by range of exercise price:
$ 5.25 - $ 7.28 196,201 $ 6.45 6.5
$13.50 - $20.25 735,618 $ 18.93 8.6
$20.38 - $28.75 33,205 $ 25.55 9.0
$36.06 - $52.81 57,154 $ 41.17 9.3
$55.13 - $56.50 361 $ 55.95 9.8
---------
Ending balance 1,022,539
=========
Options exercisable by range of exercise
price:
$ 5.25 - $ 7.28 196,201 $ 6.45
$13.50 - $20.25 151,436 $ 17.14
$20.38 - $28.75 6,280 $ 25.90
$36.06 - $52.81 12,475 $ 40.89
$55.13 - $56.50 90 $ 55.95
---------
Options exercisable 366,482
=========
35
38
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
For the Year Ended July 31, 1997
----------------------------------------------
Weighted
Weighted Average Grant
Number of Average Date Fair
Shares Exercise Price Value
--------- -------------- -------------
Beginning balance 837,840 $ 8.30
Options granted 837,241 $ 19.38 $ 19.38
Options exercised (360,385) $ 8.82
Options forfeited (38,332) $ 16.30
---------
Ending balance 1,276,364 $ 15.18
=========
Options exercisable 467,536 $ 7.93
=========
For the Year Ended July 31, 1996
-------------------------------------------
Weighted
Weighted Average Grant
Number of Average Date Fair
Shares Exercise Price Value
--------- -------------- -------------
Beginning balance 877,263 $ 10.98
Options granted 400,160 $ 6.25 $ 6.25
Options exercised (388,171) $ 12.35
Options forfeited (51,412) $ 7.49
--------
Ending balance 837,840 $ 8.30
========
Options exercisable 667,340 $ 9.08
========
The weighted average fair values of options granted are determined using the
Black-Scholes option valuation method assuming no expected dividends. Other
assumptions used are as follows:
For the Years Ended July 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Risk-free interest rate 6.1% 6.6% 5.9%
Expected volatility 49.6% 50.2% 48.8%
Expected life 10.0 years 10.0 years 8.7 years
In conjunction with certain employment agreements, the Company issued 13,025 and
10,000 shares of restricted stock with weighted average grant date fair values
of $33.66 and $20.25 per share, respectively, during the years ended July 31,
1998 and 1997, respectively, to certain individuals in exchange for services
rendered over a three-year period.
On November 1, 1997, the Company initiated a compensatory employee stock
purchase plan for up to 500,000 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 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. During the year ended July 31, 1998, 52,731 shares of
common stock were issued with a weighted average grant date fair value of $35.37
per share.
36
39
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
On June 9, 1998, the Company initiated a restricted stock plan for up to 50,000
shares. The eligibility of an employee and the terms and amount of the grant are
determined by the Board of Directors' Compensation Committee. During the year
ended July 31, 1998, 4,400 shares of restricted stock were issued at a weighted
average grant date fair value of $43.09 per share which will vest over a
three-year period.
Compensation expense relating to the stock-based compensation plans described
above was $506,000 and $23,000 for the years ended July 31, 1998 and 1997,
respectively. No compensation expense was recognized for the year ended July 31,
1996. The effect on net income and earnings per share that would have been
recorded using the fair value based method is as follows:
For the Years Ended July 31,
-----------------------------------
1998 1997 1996
--------- ------- ---------
(In thousands, except per share amounts)
Net income reported $ 66,958 $25,125 $ 1,281
========= ======= =========
Pro forma net income 64,498 $24,138 $ 692
========= ======= =========
Earnings per common share reported $ 2.96 $ 1.33 $ 0.07
========= ======= =========
Pro forma earnings per common share $ 2.85 $ 1.28 $ 0.04
========= ======= =========
Earnings per common share - assuming dilution reported $ 2.87 $ 1.30 $ 0.07
========= ======= =========
Proforma earnings per common share - assuming dilution $ 2.77 $ 1.25 $ 0.04
========= ======= =========
The effect on net income and earnings per share may not be representative of the
effects on future net income and earnings per share because some options vest
over several years and additional awards may be granted.
The Company maintains a contributory defined benefit pension plan (the "Pension
Plan") for eligible participating employees in the United Kingdom offices.
Monthly contributions by employees are equal to 4% of their salaries with the
Company providing an additional contribution in an actuarially determined amount
necessary to fund future benefits to be provided under the Pension Plan.
Benefits provided are based upon 1/60 of the employee's final pensionable salary
(as defined) for each complete year of service up to 2/3 of the employee's final
pensionable salary and increase annually at 5%. The Pension Plan also provides
for 50% of such actual or expected benefits to be paid to a surviving spouse
upon the death of a participant. Pension Plan assets consist mainly of
investments in marketable securities which are held and managed by an
independent trustee. The net periodic pension costs are as follows:
For the Years Ended July 31,
----------------------------
1998 1997 1996
----- ----- -----
(In thousands of dollars)
Service costs (benefits earned during the period) $ 457 $ 238 $ 224
Interest costs on projected benefit obligation 441 384 292
Return on assets (695) (392) (312)
Net amortization and deferral 224 5 5
----- ----- -----
Net periodic pension costs $ 427 $ 235 $ 209
===== ===== =====
37
40
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
The funded status of the Pension Plan is as follows:
July 31,
--------------------
1998 1997
------- -------
(In thousands of dollars)
Plan assets at fair value $ 6,443 $ 5,277
Projected benefit obligation:
Actuarial present value of accumulated vested benefit
obligations 7,400 4,726
Effect of future salary increases 1,492 753
------- -------
Total projected benefit obligation 8,892 5,479
------- -------
Projected benefit obligation in excess of plan assets (2,449) (202)
Unrecognized prior service cost 49
Unrecognized net loss 2,243
------- -------
Pension liability $ (206) $ (153)
======= =======
The weighted average assumptions used to determine the projected benefit
obligation and the expected long-term rate of return on assets are as follows:
For the Years Ended July 31,
----------------------------
1998 1997 1996
---- ---- ----
Discount rate 6.5% 8.0% 8.5%
Rates of increase in compensation levels 4.5% 6.0% 6.5%
Expected long-term rate of return on assets 7.0% 8.5% 9.0%
10. COMMON AND PREFERRED STOCK
The board of directors, without any action by the stockholders, may issue up to
one million shares of authorized preferred stock, par value, $.01, in one or
more series and determine the voting rights, preferences as to dividends and in
liquidation and the conversion and other rights of such stock. There are no
shares of preferred stock outstanding as of July 31, 1998.
On May 27, 1997, the board of directors of the Company declared a distribution
of one right for each outstanding share of common stock or Exchangeable Stock
(see Note 2) to shareholders of record at the close of business on June 12, 1997
and designated 400,000 shares of the authorized preferred stock as a class to be
distributed under a shareholder rights agreement. Upon the occurrence of certain
events enumerated by the shareholder rights agreement, each right entitles the
registered holder to purchase a fraction of a share of the Company's authorized
preferred stock or the common stock of an acquiring company. The rights, among
other things, will cause substantial dilution to a person or group that attempts
to acquire the Company. The rights expire on May 15, 2007 but may be redeemed
earlier.
In July 1998, the Board of Directors approved a stock repurchase program under
which the Company is authorized to buy up to 1,000,000 shares of its outstanding
common stock in open market transactions. At July 31, 1998, the Company had
repurchased 50,000 shares at $34.50 per share.
11. WARRANTS
In conjunction with the cancellation of a previous issue of common and preferred
stock and certain other liabilities, the Company authorized 454,545 warrants
which may be exercised for 454,545 shares of common stock. The warrants were
issued for a term of five years beginning July 5, 1991 at an exercise price of
$18.00 per share. The warrants could only be exercised for cash. Warrants for
29,433 shares were exercised on July 5, 1996 and the remaining warrants expired.
38
41
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
In conjunction with a previously outstanding secured term loan, the Company
issued 113,333 warrants exercisable at a price of $6.00 per share. The warrants
were exercised in December 1996.
In conjunction with previously outstanding short-term related party loans, the
Company issued warrants to purchase 120,000 common shares for cash at a price of
$4.50 per share to the lenders. As of July 31, 1998, all warrants have been
exercised.
12. WRITE-OFF/WRITE-DOWN OF ASSETS
In connection with the Combination, management committed the Company to a plan
to upgrade its seismic data processing hardware. Certain equipment was scheduled
to be replaced by October 1996. During July 1996, the Company recognized
impairment of $3,628,000 relating to the abandonment of the equipment to be
replaced.
13. OTHER COSTS AND EXPENSES
Other costs and expenses consist of the following:
For the Years Ended July 31,
---------------------------------------
1998 1997 1996
------- ------- -------
(In thousands of dollars)
Net foreign currency exchange (gains) losses $ 2,333 $ 46 $ (156)
Net loss on disposition of property and equipment 1,549 1,151 875
Interest income (4,220) (552) (547)
Other (15) 374
------- ------- -------
Total $ (338) $ 630 $ 546
======= ======= =======
14. EARNINGS PER COMMON SHARE
Earnings per common share and earnings per common share - assuming dilution are
computed as follows:
For the Years Ended July 31,
-------------------------------------
1998 1997 1996
------- ------- -------
(In thousands, except per share amounts)
Net income $66,958 $25,125 $ 1,281
======= ======= =======
Weighted average common shares 22,594 18,898 17,882
======= ======= =======
Earnings per common share $ 2.96 $ 1.33 $ 0.07
======= ======= =======
Weighted average common shares - assuming dilution:
Weighted average common shares 22,594 18,898 17,882
Shares issuable from assumed conversion of:
Options 721 432 86
Warrants 34 127
------- ------- -------
Total 23,315 19,364 18,095
======= ======= =======
Earnings per common share - assuming dilution $ 2.87 $ 1.30 $ 0.07
======= ======= =======
Exchangeable Stock issued in the business combination between Digicon, and VES
is included in both computations. (See Note 2.) Options to purchase 22,810
common shares at exercise prices ranging from $42 to $56 1/2 expiring through
July 2008 and 241,489 common shares at exercise prices ranging from 127/8 to 13
1/2 expiring through November 2002 have been excluded from the computation
assuming
39
42
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
dilution for the years ended July 31, 1998, and 1996, respectively,
because the options' exercise prices exceeded the average market price of the
underlying common shares. There were no anti-dilutive options for the year ended
July 31, 1997.
15. RELATED PARTY TRANSACTIONS
The Company is party to transactions with P.T. Digicon Mega Pratama ("P.T.
Digicon"), an 80% owned joint venture (see Note 3), in the normal course of
business. During the years ended July 31, 1998, 1997 and 1996, the Company
charged P.T. Digicon $368,000, $1,429,000 and $1,207,000, respectively, relating
to allocations of corporate administrative expenses and actual expenses incurred
by P.T. Digicon for salary cost, insurance and equipment charges. Advances from
the Company to P.T. Digicon of $13,847,000 and $14,784,000 at July 31, 1998 and
1997, respectively, have no formal repayment terms and do not bear interest.
16. GEOGRAPHICAL INFORMATION
Substantially all of the Company's operations consist of geophysical services.
The following tables provide relevant information for the years ended July 31,
1998, 1997 and 1996, grouped by major geographic areas.
Intersegment sales between geographic areas are valued at current market prices.
For the Year Ended July 31, 1998
------------------------------------------------------------------------------------
Revenues
---------------------------------------------- Operating
Unaffiliated Intersegment Profit Identifiable
Customers Sales Total (Loss) Assets
------------ ------------ --------- ---------- ------------
(In thousands of dollars)
Geographic areas:
Europe $ 51,089 $ 6,819 $ 57,908 $ 18,945 $ 56,699
Middle East 13,632 13,632 (3,762) 12,243
Asia Pacific 42,462 42,462 7,746 39,328
Latin America 93,494 93,494 6,302 45,068
Canada 47,059 112 47,171 1,616 23,581
Eliminations (70) (70)
--------- --------- --------- --------- ---------
Totals 247,736 6,861 254,597 30,847 176,919
United States 281,223* 4 281,227* 95,095 239,317
Eliminations (6,865) (6,865)
--------- --------- --------- --------- ---------
Totals 528,959 528,959 125,942 416,236
Corporate expenses (18,758)
Interest (7,318)
Other 338
Income taxes (34,218)
Investments in 50% or less-owned
companies and joint ventures 972 2,943
Corporate assets 59,311
--------- --------- --------- --------- ---------
Totals $ 528,959 $ $ 528,959 $ 66,958 $ 478,490
========= ========= ========= ========= =========
- ----------------------
* Includes export sales of $458.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1998. During 1998, depreciation and amortization
expense was $4,062,000 for Europe; $4,415,000 for Middle East; $5,064,000 for
Asia Pacific; $5,478,000 for Latin America; $8,541,000 for Canada and
$28,561,000 for the United States. Capital expenditures were $34,942,000 for
Europe; $3,122,000 for Middle East; $15,071,000 for Asia Pacific; $7,057,000 for
Latin America; $5,494,000 for Canada and $33,863,000 for the United States.
40
43
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
For the Year Ended July 31, 1997
----------------------------------------------------------------------------------
Revenues
------------------------------------------------ Operating
Unaffiliated Intersegment Profit Identifiable
Customers Sales Total (Loss) Assets
------------ ------------ --------- ----------- ------------
(In thousands of dollars)
Geographic areas:
Europe $ 42,798 $ 9,982 $ 52,780 $ 14,756 $ 31,880
Middle East 2,403 2,403 (603) 12,607
Asia Pacific 30,203 30,203 2,661 30,538
Latin America 51,157 51,157 1,884 29,052
Canada 52,141 2,698 54,839 2,763 31,924
Eliminations (2,705) (2,705)
--------- --------- --------- --------- ---------
Totals 178,702 9,975 188,677 21,461 136,001
United States 184,013* 169 184,182* 28,967 166,696
Eliminations (10,144) (10,144)
--------- --------- --------- --------- ---------
Totals 362,715 362,715 50,428 302,697
Corporate expenses (11,408)
Interest (7,484)
Merger related costs (597)
Other (630)
Income taxes (6,062)
Investments in 50% or less-owned
companies and joint ventures 878 2,908
Corporate assets 79,484
--------- --------- --------- --------- ---------
Totals $ 362,715 $ $ 362,715 $ 25,125 $ 385,089
========= ========= ========= ========= =========
- -------------------
* Includes export sales of $4,115.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1997. During 1997, depreciation and amortization
expense was $2,818,000 for Europe; $939,000 for Middle East; $2,996,000 for Asia
Pacific; $4,550,000 for Latin America; $8,961,000 for Canada and $20,367,000 for
the United States. Capital expenditures were $4,783,000 for Europe; $11,136,000
for Middle East; $6,845,000 for Asia Pacific; $4,883,000 for Latin America;
$6,560,000 for Canada and $61,843,000 for the United States.
41
44
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
For the Year Ended July 31, 1996
-------------------------------------------------------------------------------------
Revenues
----------------------------------------------- Operating
Unaffiliated Intersegment Profit Identifiable
Customers Sales Total (Loss) Assets
------------- ------------ --------- --------- ------------
(In thousands of dollars)
Geographic areas:
Europe $ 37,394 $ 1,532 $ 38,926 $ 8,065 $ 35,463
Asia Pacific 30,558 30,558 1,745 23,590
Latin America 36,346 92 36,438 (1,289) 29,758
Canada 47,423 87 47,510 4,079 30,666
--------- --------- --------- --------- ---------
Totals 151,721 1,711 153,432 12,600 119,477
United States 98,875* 61 98,936* 8,736 77,561
Eliminations (1,772) (1,772)
--------- --------- --------- --------- ---------
Totals 250,596 250,596 21,336 197,038
Corporate expenses (7,255)
Interest (5,466)
Merger related costs (3,666)
Other (546)
Income taxes (2,009)
Investments in 50% or less-owned
companies and joint ventures (1,113) 1,463
Corporate assets 91
--------- --------- --------- --------- ---------
Totals $ 250,596 $ $ 250,596 $ 1,281 $ 198,592
========= ========= ========= ========= =========
- --------------------------
* Includes export sales of $4,774.
There was no single client that accounted for 10% or more of total revenues
during the year ended July 31, 1996. During 1996, operating profit (loss)
included write-off/write-down for impairment of assets of $2,091,000 for Europe;
$1,127,000 for Asia Pacific and $410,000 for the United States. Depreciation and
amortization expense was $5,182,000 for Europe; $1,707,000 for Asia Pacific;
$4,655,000 for Latin America; $7,689,000 for Canada and $7,688,000 for the
United States. Capital expenditures were $4,088,000 for Europe; $6,795,000 for
Asia Pacific; $4,734,000 for Latin America; $3,657,000 for Canada and
$13,586,000 for the United States.
42
45
VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1998, 1997 AND 1996
17. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
For the Year Ended July 31, 1998
--------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands of dollars, except per share amounts)
Revenues $142,186 $123,569 $122,810 $140,394
Gross profit 48,933 42,765 47,429 42,936
Net income 21,319 17,677 16,062 11,900
Earnings per common share* .95 .79 .71 .52
Earnings per common share - assuming dilution* .94 .76 .69 .51
For the Year Ended July 31, 1997
--------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands of dollars, except per share amounts)
Revenues $ 76,405 $ 90,691 $ 86,843 $108,776
Gross profit 18,085 22,709 23,499 26,766
Merger related costs 597
Net income 5,168 6,507 6,086 7,364
Earnings per common share* .28 .35 .32 .37
Earnings per common share - assuming dilution* .27 .34 .32 .37
* Quarterly per share amounts may not total to annual per share amounts because
weighted average common shares for the quarter may vary from weighted average
common shares for the year.
43
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported in Form 10-K for the fiscal year ended July 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the material
appearing under the headings "Election of Directors - Nominees" and "Other
Information - Executive Officer Tenure and Identification" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the material
appearing under the heading "Other Information - Executive Compensation" in the
Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the material
appearing under the headings "Election of Directors" and "Other Information -
Certain Stockholders" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the material
appearing under the heading "Other Information - Certain Transactions" in the
Proxy Statement for the 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
Page Number
-----------
Reports of Independent Accountants 15
Consolidated Statements of Income for the Three Years Ended July 31, 1998 18
Consolidated Balance Sheets as of July 31, 1998 and 1997 19
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1998 20
Consolidated Statements of Changes in Stockholders' Equity for the Three Years
Ended July 31, 1998 22
Notes to Consolidated Financial Statements 23
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
Individual financial statements of 50% or less-owned companies and joint
ventures accounted for by the equity method have been omitted because such 50%
or less-owned companies and joint ventures, considered in the aggregate as a
single subsidiary, would not constitute a significant subsidiary.
44
47
FORM 8-K REPORTS DURING THE QUARTER ENDED JULY 31, 1998
No Form 8-K reports were filed during the quarter ended July 31, 1998.
EXHIBIT INDEX
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.)
4-F) Restricted Stock Plan. (Exhibit 4.1 of Veritas DGC Inc.'s
Registration Statement No. 333-57603 dated June 24, 1998 is
incorporated herein by reference.)
4-G) Key Contributor Incentive Plan for Fiscal Year 1998 as Amended
and Restated September 29, 1998. (Exhibit 4.7 to Veritas DGC
Inc.'s Registration Statement No. 333-65081 dated September
30, 1998 is incorporated herein by reference.)
9) Voting and Exchange Trust Agreement dated August 30, 1996
among Digicon Inc., Veritas Energy Services Inc. and the R-M
Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s Current
Report on Form 8-K dated September 16, 1996 is incorporated
herein by reference.)
10-A) 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.)
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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) 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.)
10-E) 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-F) Employment Agreement executed by David B. Robson. (Exhibit
10-L to Veritas Inc.'s Form 10-K for the year ended July 31,
1997 is incorporated herein by reference.)
10-G) 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-H) 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-I) 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-J) 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-K) Credit Agreement dated July 27, 1998 among Veritas DGC Inc.,
as borrower, and Bank One, Texas, N.A., as issuing bank, as a
bank and as agent for the banks, and the banks named therein.
10-L) 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. (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-M) Letter dated September 27, 1996 from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement
dated July 18, 1996. (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-N) Letter dated May 28, 1997 from Wells Fargo Bank (Texas),
National Association, agreeing to amend the Credit Agreement
dated July 18, 1996. (Exhibit 10-J to Veritas DGC Inc.'s Form
10-Q for the quarter ended April 30, 1997 is incorporated
herein by reference.)
16) Letter regarding change in certifying accountants. (Exhibit
16.1 of Veritas DGC Inc.'s Current Report on Form 8-K as
amended by Form 8-K/A dated November 27, 1996 and December 4,
1996, respectively, is incorporated herein by reference.)
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*21) Subsidiaries of the Registrant.
*23-A) Consent of PricewaterhouseCoopers LLP.
*23-B) Consent of PricewaterhouseCoopers, Chartered Accountants.
*23-C) Consent of Deloitte & Touche LLP.
*27-A) Financial Data Schedule for the year ended July 31, 1998 filed electronically herewith.
*27-B) Financial Data Schedule for the year ended July 31, 1997 filed electronically herewith.
*27-C) Financial Data Schedule for the year ended July 31, 1996 filed electronically herewith.
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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 2nd day of October,
1998.
VERITAS DGC INC.
By: /s/ DAVID B. ROBSON
------------------------------------------------
David B. Robson
(Chairman of the Board and Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant in the indicated capacities have
signed this report below on the 2nd day of October, 1998.
Signature Title
--------- -----
/s/ DAVID B. ROBSON Chairman of the Board and Chief Executive
--------------------------------------------- Officer, Director
David B. Robson
/s/ STEPHEN J. LUDLOW President and Chief Operating Officer,
--------------------------------------------- Director
Stephen J. Ludlow
/s/ LAWRENCE C. FICHTNER Executive Vice President - Corporate
--------------------------------------------- Communications, Director
Lawrence C. Fichtner
/s/ ANTHONY TRIPODO Executive Vice President, Chief Financial and
--------------------------------------------- Accounting Officer and Treasurer
Anthony Tripodo
/s/ CLAYTON P. CORMIER Director
---------------------------------------------
Clayton P. Cormier
/s/ RALPH M. EESON Director
---------------------------------------------
Ralph M. Eeson
/s/ JAMES R. GIBBS Director
---------------------------------------------
James R. Gibbs
Director
---------------------------------------------
Steven J. Gilbert
Director
---------------------------------------------
Brian F. MacNeill
Director
---------------------------------------------
Douglas B. Thompson
Director
---------------------------------------------
Jack C. Threet
48