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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-7427
VERITAS DGC INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0343152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10300 TOWN PARK
HOUSTON, TEXAS 77072
(Address of principal executive offices) (Zip Code)
(832) 351-8300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of the Company's common stock, $.01 par value, outstanding
at May 30, 2001 was 32,267,613 (including 1,565,001 Veritas Energy Services Inc.
exchangeable which are identical to the Common Stock in all material respects).
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VERITAS DGC INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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Page Number
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income and Comprehensive Income -
For the Three and Nine Months Ended April 30, 2001 and 2000 1
Consolidated Balance Sheets - April 30, 2001 and July 31, 2000 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended April 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 12
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands)
Revenue $ 126,617 $ 93,742 $ 372,331 $ 253,442
Costs and expenses:
Cost of services 84,401 62,931 254,997 166,256
Research and development 2,701 2,079 7,374 6,119
Depreciation and amortization 17,128 17,490 50,458 54,328
Selling, general and administrative 7,026 4,569 19,375 12,279
--------- --------- --------- ---------
Operating income 15,361 6,673 40,127 14,460
Other income (expense):
Interest expense (3,483) (3,605) (10,541) (10,595)
Other income 1,468 882 5,621 1,738
--------- --------- --------- ---------
Income before provision for income taxes and extraordinary item 13,346 3,950 35,207 5,603
Provision for income taxes 4,962 1,411 14,595 2,474
--------- --------- --------- ---------
Income before extraordinary item 8,384 2,539 20,612 3,129
Extraordinary loss on debt repurchase (net of tax, $95) 187
--------- --------- --------- ---------
Net income $ 8,384 $ 2,539 $ 20,612 $ 2,942
========= ========= ========= =========
Comprehensive income (loss) (net of tax - $0 in all periods):
Net income $ 8,384 $ 2,539 $ 20,612 $ 2,942
Foreign currency translation adjustments (2,438) (1,649) (3,950) 588
Unrealized gain (loss) on investments-available for sale (1,767) 356 1,534 (923)
Unrealized loss on hedge transaction (488) (488)
--------- --------- --------- ---------
Comprehensive income $ 3,691 $ 1,246 $ 17,708 $ 2,607
========= ========= ========= =========
Earnings Per Share:
Basic
Income per common share before extraordinary item $ .26 $ .10 $ .68 $ .12
Loss per common share from extraordinary item 0 0 0 0
--------- --------- --------- ---------
Net income per common share $ .26 $ .10 $ .68 $ .12
========= ========= ========= =========
Weighted average common shares 31,860 26,080 30,174 25,055
========= ========= ========= =========
Diluted
Income per common share before extraordinary item $ .26 $ .09 $ .67 $ .12
Loss per common share from extraordinary item 0 0 0 (.01)
--------- --------- --------- ---------
Net income per common share $ .26 $ .09 $ .67 $ .11
========= ========= ========= =========
Weighted average common shares 32,627 26,817 30,981 25,631
========= ========= ========= =========
See Notes to Consolidated Financial Statements
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VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, JULY 31,
2001 2000
--------- ---------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 94,740 $ 43,154
Restricted cash investments 206
Accounts and notes receivable (net of allowance: April $1,841; July $1,749) 152,029 117,242
Materials and supplies inventory 4,610 5,055
Investments-available for sale 1,420 3,984
Prepayments and other 11,119 6,435
--------- ---------
Total current assets 263,918 176,076
Property and equipment 445,327 409,284
Less accumulated depreciation 286,814 262,706
--------- ---------
Property and equipment - net 158,513 146,578
Multi-client data library 274,530 231,274
Goodwill (net of accumulated amortization: April $6,200; July $4,984) 33,363 11,064
Deferred tax asset 34,867 34,064
Other assets 25,590 12,752
--------- ---------
Total $ 790,781 $ 611,808
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 15 $ 106
Accounts payable - trade 49,822 37,434
Accrued interest 563 3,856
Other accrued liabilities 45,526 39,620
Income taxes payable 15,220 2,116
--------- ---------
Total current liabilities 111,146 83,132
Non-current liabilities:
Long-term debt - less current maturities 135,000 135,000
Other non-current liabilities 11,306 10,732
--------- ---------
Total non-current liabilities 146,306 145,732
Stockholders' equity:
Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 30,602,763 shares at
April and 25,069,834 shares at July (excluding exchangeable shares of 1,569,736
at April and 2,014,205 at July) 306 251
Additional paid-in capital 402,111 269,355
Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) 141,745 121,133
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment (7,721) (3,771)
Unrealized loss on investments-available for sale (80) (1,615)
Unrealized loss on hedge transaction (488)
Unearned compensation (1,416) (597)
Treasury stock, at cost: 63,935 shares at April and 104,175 shares at July (1,128) (1,812)
--------- ---------
Total stockholders' equity 533,329 382,944
--------- ---------
Total $ 790,781 $ 611,808
========= =========
See Notes to Consolidated Financial Statements
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VERITAS DGC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30,
-------------------------------
2001 2000
------------ ------------
(In thousands)
OPERATING ACTIVITIES:
Net income $ 20,612 $ 2,942
Non-cash items included in net income:
Depreciation and amortization 50,458 54,328
Net (gain) loss on disposition of property and equipment (1,049) 182
Equity in loss of joint venture 19 259
Amortization of multi-client data library 444 745
Deferred taxes (386) (9,576)
Amortization of unearned compensation 531 513
Change in operating assets and liabilities (62,881) (75,243)
------------ ------------
Total cash provided by (used in) operating activities 7,748 (25,850)
INVESTING ACTIVITIES:
Decrease in restricted cash investments 206 98
Acquisitions, net of cash received (135) (2,262)
Sale of KC Offshore, net 6,935
Sale of Brigham Exploration Company stock 4,098
Purchase of property and equipment (58,830) (39,505)
Sale of property and equipment 3,741 3,036
------------ ------------
Total cash used in investing activities (50,920) (31,698)
FINANCING ACTIVITIES:
Payments from long-term debt (442) (296)
Senior notes issue costs (34)
Net proceeds from sale of common stock 95,576 20,063
Purchase of treasury stock (145)
------------ ------------
Total cash provided by financing activities 95,134 19,588
Currency loss on foreign cash (376) (11)
------------ ------------
Change in cash and cash equivalents 51,586 (37,971)
Beginning cash and cash equivalents balance 43,154 73,447
------------ ------------
Ending cash and cash equivalents balance $ 94,740 $ 35,476
============ ============
See Notes to Consolidated Financial Statements
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VERITAS DGC INC. AND SUBSIDIARIES
SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30,
---------------------------
2001 2000
------------ -------------
(In thousands)
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in property and equipment for accounts payable - trade $ 4,861 $ 713
Stock and options issued for purchase of Enertec Resource Services Inc. (net of cash
received) 25,189
Stock and options issued for purchase of Reservoir Characterization Research and
Consulting, Inc. 34,392
See Notes to Consolidated Financial Statements
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VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
We provide integrated geophysical services to the petroleum industry
worldwide. The accompanying consolidated financial statements include our
accounts and the accounts of majority-owned domestic and foreign subsidiaries.
Investment in an 80% owned joint venture is accounted for on the equity method
due to provisions in the joint venture agreement that give minority shareholders
the right to exercise control. All material intercompany balances and
transactions have been eliminated. All material adjustments consisting only of
normal recurring adjustments that, in the opinion of management are necessary
for a fair statement of the results for the interim periods have been reflected.
These interim financial statements should be read in conjunction with our annual
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions 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.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
as appropriate, at fair value. Gains or losses resulting from changes in the
fair values of those derivatives are accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting. We adopted this
statement in the first quarter of the current year with no material impact on
the consolidated financial statements.
2. PURCHASE OF RESERVOIR CHARACTERIZATION RESEARCH AND CONSULTING, INC.
On February 2, 2001, we consummated a merger with Reservoir
Characterization Research and Consulting, Inc., ("RC2"), a Colorado corporation.
Under the terms of the agreement, we acquired 100% of RC2 in exchange for
1,137,466 shares of our common stock.
The total purchase price of RC2 was $34.4 million, comprised of $33.0
million of stock and $1.4 million of options. The acquisition was accounted for
as a purchase with the preliminary allocation of purchase price, in accordance
with APB 16, yielding $2.4 million of current assets, $10.3 million of property
and long term assets, $2.3 million of liabilities, and $24.0 million of
goodwill. Goodwill will be amortized over no more than 20 years.
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VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. OTHER INCOME
Other income consists of the following:
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(In thousands)
Interest income $ 1,424 $ 914 $ 4,059 $ 2,457
Net (loss) gain on disposition of property and equipment (4) (74) 1,049 (182)
Net foreign currency exchange gains (losses) 141 (18) 500 (256)
Other (93) 60 13 (281)
------- ------- ------- -------
Total $ 1,468 $ 882 $ 5,621 $ 1,738
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4. EARNINGS PER COMMON SHARE
Earnings per common share - basic and diluted are computed as follows:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
Income before extraordinary item $ 8,384 $ 2,539 $ 20,612 $ 3,129
Extraordinary loss on debt repurchase 187
------------ ------------ ------------ ------------
Net income $ 8,384 $ 2,539 $ 20,612 $ 2,942
============ ============ ============ ============
BASIC
Weighted average common shares 31,860 26,080 30,174 25,055
Income per common share before extraordinary item $ .26 $ .10 $ .68 $ .12
Loss per common share from extraordinary item
------------ ------------ ------------ ------------
Net income per common share $ .26 $ .10 $ .68 $ .12
============ ============ ============ ============
DILUTED
Weighted average common shares - assuming dilution:
Weighted average common shares 31,860 26,080 30,174 25,055
Shares issuable from assumed conversion of options 767 737 807 576
------------ ------------ ------------ ------------
Total 32,627 26,817 30,981 25,631
============ ============ ============ ============
Income per common share before extraordinary item $ .26 $ .09 $ .67 $ .12
Loss per common share from extraordinary item (.01)
------------ ------------ ------------ ------------
Net income per common share $ .26 $ .09 $ .67 $ .11
============ ============ ============ ============
Veritas Energy Services Inc. exchangeable shares, which were issued in
business combinations, and may be exchanged for our common stock and are
identical to our common stock in all material respects, are included in the
above computations.
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VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On October 26, 1999, we filed a prospectus supplement relating to the sale
of up to 2.0 million shares of our common stock, from time to time through
ordinary brokerage transactions, under a shelf registration. For the nine months
ended April 30, 2001, we issued approximately 0.1 million shares in connection
with these transactions, generating approximately $2.9 million in net proceeds.
In October 2000, we completed an offering of 3.1 million shares of common stock
under the shelf registration statement, generating $82.4 million in net
proceeds. In addition, during the nine months ended April 30, 2001, 0.7 million
options were exercised, generating $9.8 million in net proceeds, and
approximately 40,000 shares were purchased under the employee stock purchase
plan, generating $0.9 million in net proceeds.
The following options to purchase common shares have been excluded from the
computation assuming dilution because the options' exercise prices exceeded the
average market price of the underlying common shares as of the date the period
ended.
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------------------- -------------------------------------
2001 2000 2001 2000
------------------ ----------------- ----------------- -----------------
Number of options 404,840 725,314 168,327 1,372,340
Exercise price range $31 1/2 - $55 1/8 $19 3/8 - $55 1/8 $28 3/4 - $55 1/8 $17 1/16- $55 1/8
Expiring through March 2011 March 2010 March 2011 March 2010
5. UNREALIZED LOSS ON INVESTMENTS-AVAILABLE FOR SALE
In fiscal year 1999, we exchanged a $4.7 million account receivable from
Miller Exploration Company (Miller), a publicly traded company, for a long-term
note receivable paying 18% interest. The interest rate changed to 9 3/4%,
effective October 15, 2000. For the periods April 15, 1999 to October 14, 2000,
interest was paid in common stock warrants, with an exercise price of $0.01 per
share, in advance, at six-month intervals. Beginning October 15, 2000, interest
is paid in cash after the six-month intervals and no additional warrants will be
issued. In addition, in fiscal year 1999, we exchanged an account receivable
from Brigham Exploration Company, a publicly traded company, for shares of
Brigham common stock. The stock from this exchange was sold in April 2001 for
$4.1 million resulting in an immaterial gain. The cost basis of the investments
available for sale is determined by the fair market value on the date received.
April 30, 2001 July 31, 2000
---------------------------------------------- -------------------------------------------
Unrealized Unrealized
Cost Basis loss Fair Value Cost Basis loss Fair Value
------------ ------------ ---------- ----------- ---------- ------------
(In thousands)
Brigham common stock $ 4,099 $ (1,411) $ 2,688
Miller warrants $ 1,500 $ (80) $ 1,420 1,500 (204) 1,296
------------ ------------ ---------- ----------- --------- ------------
$ 1,500 $ (80) $ 1,420 $ 5,599 $ (1,615) $ 3,984
============ ============ ========== =========== ========= ============
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VERITAS DGC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SEGMENT INFORMATION
We have two segments, land and marine operations, both of which provide
geophysical products and services to the petroleum industry. The two segments
have been aggregated, as they are similar in their economic characteristics and
the nature of their products, production processes and customers. A
reconciliation of the reportable segments' results to those of the total
enterprise is given below:
Three Months Ended Three Months Ended
April 30, 2001 April 30, 2000
--------------------------------------- ---------------------------------------
Segments Corporate Total Segments Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Revenue $ 126,617 $ 126,617 $ 93,742 $ 93,742
Costs and expenses 102,453 $ 10,818 113,271 81,630 $ 8,162 89,792
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before income tax $ 24,164 $ (10,818) 13,346 $ 12,112 $ (8,162) $ 3,950
Nine Months Ended Nine Months Ended
April 30, 2001 April 30, 2000
------------------------------------ ------------------------------------
Segments Corporate Total Segments Corporate Total
--------- --------- --------- --------- --------- ---------
(In thousands)
Revenue $ 372,331 $ 372,331 $ 253,442 $ 253,442
Costs and expenses 306,677 $ 30,447 337,124 222,456 $ 25,383 247,839
--------- --------- --------- --------- --------- ---------
Net income (loss) before income tax $ 65,654 $ (30,447) $ 35,207 $ 30,986 $ (25,383) $ 5,603
7. HEDGE TRANSACTION
In March 2001, we entered into a contract requiring payments in Norwegian
kroner to charter the seismic vessel M/V Seisquest. The contract requires 36
monthly payments commencing on June 1, 2001. To protect our exposure to exchange
rate risk, we entered into multiple forward contracts as cash flow hedges
effectively locking our exchange rate for Norwegian kroner to the U.S. dollar.
The total value of the forward contracts in U.S. dollars is $9.7 million. The
unrealized loss on the hedge transaction is summarized below:
April 30, 2001
---------------------------------------
Forward Unrealized
value loss Fair Value
------------- ----------- ----------
(In thousands)
Forward contracts $9,711 (488) $ 9,223
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of certain factors. These factors
are more fully described in other reports filed with the Securities and Exchange
Commission, including our fiscal year 2000 Form 10-K, and include changes in
market conditions in the oil and gas industry as well as declines in prices of
oil and gas.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2001 COMPARED WITH THE THREE MONTHS ENDED APRIL 30,
2000
Revenue. Revenue increased 35%, from $93.7 million to $126.6 million due to a
general increase in exploration spending by our customers in the current
quarter. Multi-client revenue increased 17%, from $46.4 million to $54.3
million. This is primarily due to licensing of our new Canadian Foothill
surveys. Contract revenue increased 53%, from $47.3 million to $72.3 million,
driven by an overall improvement in activity and additional crews in Alaska and
Canada.
Operating income. Operating income increased 130% from $6.7 million to $15.4
million. Operating margin (revenue less cost of services) remained essentially
flat. Research and development expense increased 29%, from $2.1 million to $2.7
million as a result of our continuing efforts to develop and employ leading edge
technologies to improve the quality of our products and services. Selling,
general and administrative expense increased 52%, from $4.6 million to $7.0
million as a result of an increase in personnel cost, outside services for the
new headquarters facility in Houston, and an expansion of our e-business and
health and safety initiatives.
Other income (expense). Interest expense remained essentially flat, with
long-term debt being the same in both quarters. Other income increased from $0.9
million to $1.5 million primarily due to the increase in interest income as a
result of the increase in cash.
Income taxes. Income taxes increased from $1.4 million to $5.0 million as a
result of our higher earnings in the current quarter with the effective rate
remaining essentially flat.
NINE MONTHS ENDED APRIL 30, 2001 COMPARED WITH THE NINE MONTHS ENDED APRIL 30,
2000
Revenue. Revenue increased 47%, from $253.4 million to $372.3 million due to a
general increase in exploration spending by our customers in the current year.
Multi-client revenue increased 37%, from $128.6 million to $176.3 million. This
is largely due to increased licensing of multi-client surveys in the Gulf of
Mexico, Canada and the U.S. Contract revenue increased 57%, from $124.8 million
to $196.0 million, driven by improvements in vessel activity for contract work,
specifically in Asia and Canada, and increased utilization of land crews.
Operating income. Operating income increased 177% from $14.5 million to $40.1
million. Operating margin (revenue less cost of services) decreased from 34% to
32% due to licensing of an increased proportion of lower margin surveys in the
current year as compared to the prior year. Depreciation and amortization
expense decreased 7% from $54.3 million to $50.5 million as a result of timing
of capital expenditures for the current year. Research and development and
selling, general and administrative expenses increased in the current year as
compared to the prior year. Research and development expense increased 21%, from
$6.1 million to $7.4 million as a result of our continuing efforts to develop
and employ leading edge technologies to improve the quality of our products and
services. Selling, general and administrative expense increased 58%, from $12.3
million to $19.4 million as a result of relocation, rent and outside service
expenses associated with
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the new headquarters facility in Houston, an increase in personnel cost and
bonus accruals, and an expansion of our e-business and health and safety
initiatives.
Other income (expense). Interest expense remained essentially flat, with
long-term debt being the same in both periods. Other income increased from $1.7
million to $5.6 million. Interest income increased by $1.6 million due to the
increase in cash. Gains on the sale of fixed assets resulted in an increase of
$1.2 million. Currency gains in the current year versus currency losses in the
prior year resulted in an increase of $0.8 million.
Income taxes. Income taxes increased from $2.5 million to $14.6 million as a
result of our higher earnings in the current year with the effective rate
remaining essentially flat.
LIQUIDITY AND CAPITAL RESOURCES
Our internal sources of liquidity are cash, cash equivalents and cash flow
from operations. External sources include public financing, equity sales, the
unutilized portion of a revolving credit facility, equipment financing and trade
credit. We believe that these sources of funds are adequate to meet our
liquidity needs through the next fiscal year.
Net cash provided by operating activities increased from ($25.9) million to
$7.7 million due primarily to higher profitability in the current year. In
addition, net cash used by working capital decreased from $75.2 million to $62.9
million. This is primarily due to a decrease in net investment in multi-client
data library in the current fiscal year as compared to the prior fiscal year.
This is offset by an increase in accounts receivable as a result of the increase
in activity for the current year.
Currently, we are forecasting $60.0 million of net investment in our data
library (measured as the change in the balance sheet account) during fiscal year
2001. Because of the elapsed time between survey execution, sale and ultimate
cash receipt, multi-client work generally requires greater amounts of working
capital than contract work. Depending upon the timing of the sales of the
multi-client surveys and the contract terms relating to the collection of the
proceeds from such sales, our liquidity may be affected. While we seek
pre-funding commitments from customers for a portion of the cost of these
surveys, pre-funding levels do not generally affect our library spending. We
believe that these multi-client surveys have good long-term revenues, earnings
and cash flow potential, but there is no assurance that we will recover the
costs of these surveys.
Net cash used in investing activities increased from $31.7 million to $50.9
million. We require significant amounts of capital to support our operations and
fund capital spending and research and development programs. Our current capital
expenditure forecast for fiscal 2001 is $105.0 million, which includes
expenditures of approximately $50 million to expand or upgrade current operating
equipment. We are forecasting $9.2 million of research and development spending
in fiscal 2001. As demand for our geophysical products and services continues to
increase during fiscal 2001, we may increase our expenditures and business
investments as we take advantage of expansion opportunities.
Net cash provided by financing activities increased from $19.6 million to
$95.1 million. As of April 30, 2001, we had $135.0 million in senior notes
outstanding due in October 2003. These notes contain a change of control
provision allowing them to be callable by the holder under certain conditions.
We also have a revolving credit facility due July 2001 from commercial lenders
that provides advances up to $50.0 million. At April 30, 2001, the borrowing
base exceeded the credit limit. Advances bear interest, at our election, at
LIBOR plus a margin based on certain financial ratios maintained by us or prime
rate. Advances are secured by certain accounts receivable. As of April 30, 2001,
there were no outstanding advances under the credit facility, but $5.8 million
of the credit facility was utilized for letters of credit. An additional $44.2
million is available for borrowings. We are currently in negotiations for a new
credit facility with the expected closing in June 2001.
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To ensure that we have available as many financing options as possible, we
filed a shelf registration allowing the issuance of up to $200 million in debt,
preferred stock or common stock. On October 26, 1999, we filed a prospectus
supplement relating to the sale of up to 2.0 million shares of our common stock,
from time to time through ordinary brokerage transactions, under the shelf
registration. For the nine months ended April 30, 2001, we issued approximately
0.1 million shares in connection with these transactions, generating
approximately $2.9 million in net proceeds. In addition, in October 2000, we
completed an offering of 3.1 million shares of common stock under the shelf
registration statement. This offering generated $82.4 million in net proceeds.
The total issuance of equity under the shelf registration has been approximately
4.4 million shares generating $112.5 million in net proceeds.
We will require substantial cash flow to continue operations on a
satisfactory basis, complete our capital expenditure and research and
development programs and meet our principal and interest obligations with
respect to outstanding indebtedness. While we believe that we have adequate
sources of funds to meet our liquidity needs, our ability to meet our
obligations depends on our future performance, which, in turn, is subject to
many factors beyond our control. Key internal factors affecting future results
include utilization levels of acquisition and processing assets and the level of
multi-client data library licensing, all of which are driven by our client's
exploration spending and, ultimately, underlying commodity prices.
OTHER
Since our quasi-reorganization with respect to Digicon Inc. on July 31,
1991, the tax benefits of net operating loss carryforwards existing at the date
of the quasi-reorganization have been recognized through a direct addition to
additional 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. For
the nine months ended April 30, 2001, $1.7 million has been recognized related
to these benefits, due to our U.K. operation's increased profitability.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
as appropriate, at fair value. Gains or losses resulting from changes in the
fair values of those derivatives are accounted for depending on the use of the
derivatives and whether they qualify for hedge accounting. We adopted this
statement in the first quarter of the current fiscal year with no material
impact on the consolidated financial statements.
On February 2, 2001, we acquired Reservoir Characterization Research and
Consulting, Inc., ("RC2"), a Colorado corporation in an acquisition accounted
for as a purchase. The total purchase price was $34.4 million, consisting of
stock and options.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
In March 2001, we entered into a contract requiring payments in Norwegian
kroner to charter the seismic vessel M/V Seisquest. The contract requires 36
monthly payments commencing on June 1, 2001. To protect our exposure to exchange
rate risk, we entered into multiple forward contracts as cash flow hedges
effectively locking our exchange rate for Norwegian kroner to the U.S. dollar.
The total value of the forward contracts in U.S. dollars is $9.7 million.
There have been no other significant changes that would affect our exposure
to market risk since July 31, 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS FILED WITH THIS REPORT:
Exhibit
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3-A) Restated Certificate of Incorporation with amendments of
Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to
Veritas DGC Inc.'s Current Report on Form 8-K dated September
16, 1996 is incorporated herein by reference.)
3-B) Certificate of Ownership and Merger of New Digicon Inc. and
Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration
Statement No. 33-43873 dated November 12, 1991 is incorporated
herein by reference.)
3-C) By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C
to Digicon Inc.'s Registration Statement No. 33-43873 dated
November 12, 1991 is incorporated herein by reference.)
3-D) Certificate of Amendment to Restated Certificate of
Incorporation of Veritas DGC Inc. dated September 30, 1999.
(Exhibit 3-D to Veritas DGC Inc.'s Form 10-K for the year
ended July 31, 1999 is incorporated herein by reference.)
3-F) By-laws of Veritas DGC Inc. as amended and restated March 7,
2000. (Exhibit 3-E to Veritas DGC Inc.'s Form 10-Q for the
quarter ended January 31, 2000 is incorporated herein by
reference.)
4-A) Specimen certificate for Senior Notes (Series A). (Included as
part of Section 2.2 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 May 15, 1997. (Exhibit 4.1
to Veritas DGC Inc.'s Current Report on Form 8-K dated May 27,
1997 is incorporated herein by reference.)
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4-E) Form of 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 as amended and restated March 7, 2000.
(Exhibit 4-F to Veritas DGC Inc.'s Form 10-Q for the quarter
ended April 30, 2000 in incorporated herein by reference.)
4-G) Key Contributor Incentive Plan as Amended and Restated dated
March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s Registration
Statement No. 333-74305 dated March 12, 1999 is incorporated
herein by reference.)
4-H) Specimen for Senior Notes (Series C). (Exhibit 4-K to Veritas
DGC Inc.'s Form 10-Q for the quarter ended January 31, 1999 is
incorporated herein by reference.)
4-I) Indentures relating to the 9 3/4% Senior Notes due 2003,
Series B and Series C of Veritas DGC Inc. between Veritas DGC
Inc. and State Street Bank and Trust Company dated October 28,
1998. (Exhibit 4.3 to Veritas DGC Inc.'s Current Report on
Form 8-K dated November 12, 1998 is incorporated herein by
reference.)
9-A) 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 to Veritas DGC Inc.'s Current
Report on Form 8-K dated September 16, 1996 is incorporated
herein by reference.)
9-B) Voting and Exchange Trust Agreement dated September 30, 1999
among Veritas DGC Inc., Veritas Energy Services Inc. and the
CIBC Mellon Trust Company.
10-A) Support Agreement dated August 30, 1996 between Digicon Inc.
and Veritas Energy Services Inc. (Exhibit 10.1 to Veritas DGC
Inc.'s Current Report on Form 8-K dated August 30, 1996 is
incorporated herein by reference.)
10-B) 1992 Non-Employee Director Stock Option Plan as amended and
restated March 7, 2000. (Exhibit 10-B to Veritas DGC Inc.'s
Form 10-Q for the quarter ended April 30, 2000 in incorporated
herein by reference.)
10-C) 1992 Employee Nonqualified Stock Option Plan as amended and
restated March 7, 2000. (Exhibit 10-C to Veritas DGC Inc.'s
Form 10-Q for the quarter ended April 30, 2000 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 DGC 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 Anthony Tripodo.
(Refer to Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 1997 is incorporated herein by
reference.)
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10-I) 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-J) Employment Agreement executed by Timothy L. Wells.
(Exhibit 10-J to Veritas DGC Inc.'s Form 10-K for the year
ended July 31, 1999 is incorporated herein by reference.)
10-K) Credit Agreement among Veritas DGC Inc., as borrower, and Bank
One, Texas, N.A., as issuing bank, as a bank and agent for the
banks, and the banks therein named dated November 1, 1999.
(Exhibit 10-N to Veritas DGC Inc.'s Form 10-Q for the quarter
ended October 31, 1999 is incorporated herein by reference.)
10-L) Sales agency agreement between Veritas DGC Inc. and Paine
Webber Incorporated, dated October 26, 1999. (Exhibit 10-N to
Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31,
1999 is incorporated herein by reference.)
10-M) Form of Indemnity Agreement between Veritas DGC Inc. and its
executive officers and directors as amended and restated March
7, 2000. (Exhibit 10-M to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 2000 is incorporated herein by
reference.)
10-N) Employment Agreement executed by Richard C. White. (Exhibit
10-Q to Veritas DGC Inc.'s Form 10-Q for the quarter ended
January 31, 2000 is incorporated herein by reference.)
10-O) Indemnity Agreement between Veritas DGC Inc. and Richard C.
White. (Exhibit 10-Q to Veritas DGC Inc.'s Form 10-Q for the
quarter ended April 30, 2000 is incorporated herein by
reference.)
10-P) Settlement Agreement between Veritas DGC Inc. and Richard C.
White. (Exhibit 10-P to Veritas DGC Inc's Form 10-Q for the
quarter ended October 31, 2000 is incorporated herein by
reference.)
10-Q) Deferred Compensation Plan effective January 1, 2001. (Exhibit
10-Q to Veritas DGC Inc's Form 10-Q for the quarter ended
October 31, 2000 is incorporated herein by reference.)
10-R) Rabbi Trust Agreement between Veritas DGC Inc. and Austin
Trust Company relating to the Deferred Compensation Plan.
(Exhibit 10-R to Veritas DGC Inc's Form 10-Q for the quarter
ended October 31, 2000 is incorporated herein by reference.)
10-S) 2001 Key Employee Nonqualified Stock Option Plan effective
February 1, 2001. (Exhibit 10-S to Veritas DGC Inc's Form 10-Q
for the quarter ended January 31, 2001 is incorporated herein
by reference.)
10-T) 2001 Key Employee Restricted Stock Plan effective February 1,
2001. (Exhibit 10-T to Veritas DGC Inc's Form 10-Q for the
quarter ended January 31, 2001 is incorporated herein by
reference.)
*10-U) Employment Agreement executed by Matthew D. Fitzgerald.
* Filed herewith
b) REPORTS ON FORM 8-K
We did not file a Form 8-K during the quarter ended April 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on the 13th day of June 2001.
VERITAS DGC INC.
By: /s/ Timothy L. Wells
--------------------------------
TIMOTHY L. WELLS
Chief Operating Officer
/s/ Matthew D. Fitzgerald
--------------------------------
MATTHEW D. FITZGERALD
Executive Vice President, Chief
Financial Officer and Treasurer
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EXHIBIT NUMBER
EXHIBIT
NUMBER DESCRIPTION
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*10-U) Employment Agreement executed by Matthew D. Fitzgerald