-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q6csFogq5QeZ0ntrv+VsnM+ftLjmiYHEfkEcZ0ehttMntoWCkZhCvG5Tm/T15Bu6 mA4pW//RYmOVgEbSX34vAA== 0000950129-03-003188.txt : 20030613 0000950129-03-003188.hdr.sgml : 20030613 20030613164449 ACCESSION NUMBER: 0000950129-03-003188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERITAS DGC INC CENTRAL INDEX KEY: 0000028866 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 760343152 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07427 FILM NUMBER: 03744071 BUSINESS ADDRESS: STREET 1: 10300 TOWN PARK DR CITY: HOUSTON STATE: TX ZIP: 77072 BUSINESS PHONE: 7135128300 MAIL ADDRESS: STREET 1: 10300 TOWN PARK DR CITY: HOUSTON STATE: TX ZIP: 77072 FORMER COMPANY: FORMER CONFORMED NAME: DIGICON INC DATE OF NAME CHANGE: 19920703 10-Q 1 h06771e10vq.txt VERITAS DGC INC.- PERIOD ENDED APRIL 30, 2003 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003 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) 10300 TOWN PARK HOUSTON, TEXAS 77072 (Address of principal executive offices) (Zip Code) (832) 351-8300 (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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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, 2003 was 33,503,081 (including 1,443,411 Veritas Energy Services Inc. exchangeable shares which are identical to the Common Stock in all material respects). ================================================================================ TABLE OF CONTENTS FORM 10-Q INDEX
Page Number ----------- PART I. Financial Information Item 1. Financial Statements Consolidated Statements of Operations and Comprehensive Income - For the Three and Nine Months Ended April 30, 2003 and 2002 1 Consolidated Balance Sheets - April 30, 2003 and July 31, 2002 2 Consolidated Statements of Cash Flows - For the Nine Months Ended April 30, 2003 and 2002 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk 16 Item 4. Controls and Procedures 17 PART II. Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 19 Certification of Chief Executive Officer 20 Certification of Chief Financial Officer 21
VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ----------------------- ----------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (In thousands, except per share amounts) Revenues .......................................................... $ 120,636 $ 109,267 $ 383,464 $ 350,268 Cost of services .................................................. 97,287 85,082 318,671 274,415 Research and development .......................................... 3,274 2,846 9,327 8,381 General and administrative ........................................ 6,261 5,854 21,744 17,886 Merger costs ...................................................... 1,658 4,416 --------- --------- --------- --------- Operating income .................................................. 13,814 13,827 33,722 45,170 Interest expense .................................................. 5,992 2,771 14,359 9,850 Other expense (income), net ....................................... 17 (1,427) 1,229 (2,219) --------- --------- --------- --------- Income before provision for income taxes .......................... 7,805 12,483 18,134 37,539 Provision for income taxes ........................................ 3,077 4,438 7,353 14,172 --------- --------- --------- --------- Net income ........................................................ $ 4,728 $ 8,045 $ 10,781 $ 23,367 Other comprehensive income (loss) (net of tax, $0 in all periods): Foreign currency translation adjustments ........................ 5,651 2,557 7,250 (1,742) Unrealized gain (loss) on investments available for sale ........ 61 (219) 77 (949) Unrealized (loss) on interest swap .............................. (410) (410) Unrealized gain (loss) on foreign currency hedge................. (235) 212 114 235 --------- --------- --------- --------- Total other comprehensive income (loss)............................ 5,067 2,550 7,031 (2,456) --------- --------- --------- --------- Comprehensive income .............................................. $ 9,795 $ 10,595 $ 17,812 $ 20,911 ========= ========= ========= ========= Weighted average common shares: Basic ........................................................... 33,348 32,446 33,243 32,381 Diluted ......................................................... 33,355 32,639 33,280 32,561 Earnings per share: Basic and diluted ............................................... $ .14 $ .25 $ .32 $ .72
See Notes to Consolidated Financial Statements 1 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value)
APRIL 30, JULY 31, 2003 2002 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .................................................................. $ 73,315 $ 10,586 Restricted cash investments ................................................................ 205 166 Accounts and notes receivable (net of allowance: $7,391 at April; $4,143 at July) ........ 124,241 128,045 Materials and supplies inventory ........................................................... 3,202 16,096 Prepayments and other ...................................................................... 13,127 12,059 Income taxes receivable .................................................................... 10,397 16,074 ----------- ----------- Total current assets ................................................................... 224,487 183,026 Property and equipment ....................................................................... 492,083 515,823 Less accumulated depreciation ................................................................ 336,280 324,742 ----------- ----------- Property and equipment, net ............................................................ 155,803 191,081 Multi-client data library .................................................................... 376,318 336,475 Investment in and advances to joint ventures ................................................. 5,011 7,433 Goodwill ..................................................................................... 39,018 34,086 Deferred tax asset ........................................................................... 15,741 13,756 Other assets ................................................................................. 31,685 14,924 ----------- ----------- Total .................................................................................. $ 848,063 $ 780,781 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ..................................................................... $ 39,867 $ 46,471 Accrued interest ........................................................................... 259 3,965 Other accrued liabilities .................................................................. 47,522 54,169 ----------- ----------- Total current liabilities .............................................................. 87,648 104,605 Non-current liabilities: Long-term debt ............................................................................. 194,613 140,000 Deferred tax liability ..................................................................... 7,409 7,310 Other non-current liabilities .............................................................. 4,616 4,654 ----------- ----------- Total non-current liabilities .......................................................... 206,638 151,964 Stockholders' equity: Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 32,062,631 shares at April and 31,171,988 shares at July (excluding Exchangeable Shares of 1,443,411 at April and 1,444,514 at July) ..................................................................... 321 311 Additional paid-in capital ................................................................. 425,239 413,813 Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.) .................... 131,222 120,441 Accumulated other comprehensive income: Cumulative foreign currency translation adjustment ........................................ (1,593) (8,843) Other comprehensive income ................................................................ 575 794 Unearned compensation ........................................................................ (483) (872) Treasury stock, at cost; 83,672 shares at April and 76,607 at July ........................... (1,504) (1,432) ----------- ----------- Total stockholders' equity ............................................................. 553,777 524,212 ----------- ----------- Total .................................................................................. $ 848,063 $ 780,781 =========== ===========
See Notes to Consolidated Financial Statements 2 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, ---------------------------- 2003 2002 ----------- ----------- (IN THOUSANDS) Operating activities: Net income ................................................................................. $ 10,781 $ 23,367 Non-cash items included in net income: Depreciation and amortization (other than multi-client) .................................. 55,808 51,499 Depreciation and amortization capitalized to multi-client library and software ........... (19,606) (21,308) Amortization of multi-client library ..................................................... 106,809 89,567 Impairment of land acquisition equipment ................................................. 1,780 Gain on disposition of property and equipment ............................................ (225) (1,655) Equity in loss (income) of joint venture ................................................. 1,158 (267) Deferred taxes ........................................................................... 170 Amortization of unearned compensation .................................................... 520 517 Change in operating assets/liabilities: Accounts and notes receivable ............................................................ 5,359 20,541 Materials and supplies inventory ......................................................... 12,903 648 Prepayments and other .................................................................... 1,161 (1,066) Income tax receivable .................................................................... 5,693 4,669 Accounts payable and other accrued liabilities ........................................... (19,365) (21,238) Other non-current liabilities ............................................................ 61 149 Other .................................................................................... (695) 2,795 ----------- ----------- Total cash provided by operating activities ........................................... 162,142 148,388 Investing activities: Increase in restricted cash investments .................................................... (39) Investment in multi-client data library, net cash .......................................... (122,652) (127,054) Purchase of property and equipment ......................................................... (19,530) (72,060) Sale of property and equipment ............................................................. 2,475 4,489 Acquisition of business .................................................................... (9,547) ----------- ----------- Total cash used by investing activities ............................................... (149,293) (194,625) Financing activities: Borrowings of long-term debt, net of debt issuance costs ................................... 308,236 Payments on long-term debt ................................................................. (260,887) Net proceeds from sale of common stock ..................................................... 2,065 2,055 ----------- ----------- Total cash provided by financing activities ........................................... 49,414 2,055 Currency loss on foreign cash .............................................................. 466 (184) ----------- ----------- Change in cash and cash equivalents ........................................................ 62,729 (44,366) Beginning cash and cash equivalents balance ................................................ 10,586 69,218 ----------- ----------- Ending cash and cash equivalents balance ................................................... $ 73,315 $ 24,852 =========== =========== CASH PAID FOR: Interest ..................................................................................... $ 16,435 $ 13,808 Taxes ........................................................................................ $ 1,553 $ 8,949
See Notes to Consolidated Financial Statements 3 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION 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. RECLASSIFICATION OF PRIOR YEAR BALANCES Certain prior year balances have been reclassified for consistent presentation. Depreciation and amortization is now included in cost of services on the "Consolidated Statements of Operations and Comprehensive Income". RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board issued SFAS No.143 (Asset Retirement Obligations). This standard requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred with the liability being initially measured at fair value. We adopted the use of this accounting statement in August 2002. Adoption did not have a material effect on our financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144 (Accounting for the Impairment or Disposal of Long Lived Assets). This standard develops one accounting model for long-lived assets that are to be disposed of by sale, requiring such assets to be measured at the lower of book value or fair value less cost to sell. The standard also provides guidance on the recognition of liabilities for the obligations arising from disposal activities. We adopted the use of this accounting statement in August 2002. Adoption did not have a material effect on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145 (Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002). Among other things, this statement addresses how to report gains or losses resulting from the early extinguishment of debt. Previously, any gains or losses were reported as an extraordinary item. Upon adoption of SFAS No. 145, an entity is required to evaluate whether the debt extinguishment is truly extraordinary in nature, in accordance with Accounting Principles Board Opinion No. 30. We adopted the use of this accounting statement in August 2002. The adoption of this statement will likely preclude extraordinary classification of costs related to early debt extinguishment, and the effect of adoption was immaterial. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146 (Accounting for Costs Associated with Exit or Disposal Activities). This standard requires recognition of costs associated with exit or disposal activities when they are incurred rather than when management commits to an exit or disposal plan. Examples of costs covered by this guidance include lease termination costs, employee severance costs that are associated with restructuring, discontinued operations, plant closings, or other exit or disposal activities. We adopted the use of this accounting statement for all activities initiated after December 31, 2002. Adoption did not have a material effect on our financial position or results of operations. 4 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In December 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements. FIN 45 expands required disclosures for certain types of guarantees and recognition of a liability at fair value of such guarantees at the time of issuance. The disclosure requirements are effective for our second fiscal quarter financial statements, while the fair value accounting requirements apply prospectively to guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did not have a material effect on our financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 amended ARB 51, Consolidated Financial Statements, and established standards for determining under what circumstances a variable interest entity (VIE) should be consolidated with its primary beneficiary. FIN 46 also requires disclosures about VIEs that the company is not required to consolidate, but in which it has a significant variable interest. Adoption of FIN 46 did not have a material effect on our financial position or results of operations. In January 2003, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the use of this accounting statement in January 2003. Adoption did not have a material effect on our financial position or results of operations. We have no plans to voluntarily expense stock options or change our current stock-based compensation program. We have included the required interim disclosures in Note 12, Stock Based Compensation. 2. BUSINESS COMBINATIONS On August 21, 2002, we acquired Hampson-Russell Software Services Ltd. ("Hampson-Russell"), a Canadian provider of software tools and consulting services related to reservoir interpretation. Under the terms of the agreement, we acquired substantially all of the assets of Hampson-Russell in exchange for a cash payment of $9,250,000, transfer of 589,623 shares of Veritas common stock ($12.30 per share), and Hampson-Russell's right to receive a percentage of the revenues generated by the purchased assets over the five years following the closing of the transaction, provided that certain financial targets are obtained. The common stock price of $12.30 was based on the average closing price for Veritas common stock for a short period up to the transaction close date. Our allocation of the $16.8 million purchase price was based on fair value as follows: $0.3 million of fees and expenses, $13.2 million to software, $3.9 million to goodwill, of which none is expected to be tax deductible, $1.1 million to accrued liabilities, $0.3 million to fixed assets and $0.2 million to other assets. The software will be amortized over no more than five years. David B. Robson, Veritas DGC's Chairman and Chief Executive Officer, beneficially owns a controlling interest in Vada Industries Ltd., which was a 25% shareholder of Hampson-Russell at the time of the acquisition. The results of operations for Hampson-Russell began to be included in our results of operations as of August 21, 2002. 3. ASSET IMPAIRMENT During the first quarter of fiscal year 2003, we incurred a $1.8 million loss for the impairment of land equipment. It was determined the fair value of the equipment was zero. The impairment loss is included in cost of services in the "Consolidated Statements of Operations and Comprehensive Income". 5 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 4. OTHER EXPENSE (INCOME), NET Other expense (income), net consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ---------------------------------------------------------- 2003 2002 2003 2002 ------- ------- ------- ------- (IN THOUSANDS) Interest income .......................................... $ (453) $ (169) $ (681) $(1,289) Net (gain) loss on disposition of property and equipment.. 210 38 (225) (354) Net gain on sale of Air-Jac subsidiary ................... (658) Net foreign currency exchange loss (gain) ................ 8 (957) 705 402 Loss (income) from unconsolidated joint venture .......... 210 (321) 1,158 (267) Other .................................................... 42 (18) 272 (53) ------- ------- ------- ------- Total ......................................... $ 17 $(1,427) $ 1,229 $(2,219) ======= ======= ======= =======
5. EARNINGS PER COMMON SHARE Basic and diluted earnings per common share are computed as follows:
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ------------------- ------------------- 2003 2002 2003 2002 ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income ....................................................... $ 4,728 $ 8,045 $10,781 $23,367 Basic: Weighted average common shares (including exchangeable shares).. 33,348 32,446 33,243 32,381 ------- ------- ------- ------- Net income per share ........................................... $ .14 $ .25 $ .32 $ .72 ======= ======= ======= ======= Diluted: Weighted average common shares (including exchangeable shares).. 33,348 32,446 33,243 32,381 Shares issuable from assumed exercise of options ............... 7 193 37 180 ------- ------- ------- ------- Total .................................................. 33,355 32,639 33,280 32,561 ------- ------- ------- ------- Net income per share ........................................... $ .14 $ .25 $ .32 $ .72 ======= ======= ======= =======
The following options to purchase common shares have been excluded from the computation assuming dilution because the options' exercise prices exceed the average market price of the underlying common shares.
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ------------------------------------ ------------------------------------ 2003 2002 2003 2002 --------------- ------------------ ---------------- ----------------- Number of options 3,854,346 1,338,676 3,221,589 1,341,626 Exercise price range $7.30 - $55.125 $16.3125 - $55.125 $10.71 - $55.125 $15.625 - $55.125 Expiring through March 2012 March 2011 March 2012 March 2011
6 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. OTHER ASSETS - SOFTWARE Software available for sale is included in other assets. A portion of the software was developed internally, and the remaining portion was obtained through the acquisition of Reservoir Characterization Research and Consulting, Inc. (RC(2)) and Hampson-Russell. The current book value of the acquired RC(2) software is $0.9 million, the book value of the internally developed software, originated in RC(2) and called Antero, is $7.3 million and the book value of the acquired Hampson-Russell software is $12.3 million. For internally developed software, we capitalize costs associated with the development of the product from the time the product reaches technological feasibility until it is ready for commercial release. The capitalized cost of the software, whether developed or purchased, is charged to cost of services in the period sales occur based on the percentage of total cost to total estimated sales multiplied by actual sales during the period. The period of amortization begins when the software is released to the market. The Antero software has not been released. In no case is the cumulative amortization for a product allowed to fall below the amount that would be recorded using straight-line amortization for that product's estimated useful life. Estimated useful lives of our software products range from three to five years. Amortization expense for the software is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ------------------ ----------------- (IN THOUSANDS) 2003 2002 2003 2002 ----- ------ -------- -------- Amortization expense ........................ $ 960 $ 644 $ 3,623 $ 1,932
The carrying value of our software is as follows:
APRIL 30, 2003 JULY 31, 2002 ------------------------------------------------------ ------------------------------------------ GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET -------- ------------ --- -------- ------------ --- (IN THOUSANDS) Software .......... $ 27,995 $ 7,474 $ 20,521 $ 13,631 $ 3,851 $ 9,780
7. LONG-TERM DEBT Long-term debt is as follows:
APRIL 30, 2003 JULY 31, 2002 -------------- ------------- (IN THOUSANDS) Term A loan due February 2006 .............................. $ 29,925 Term B loan due February 2007 .............................. 124,688 Term C loan due February 2008 .............................. 40,000 Senior Notes due October 2003, at 9 3/4% ................... $ 135,000 Revolving credit agreement, balance due August 2003 ........ 5,000 --------- --------- Total ................................................. $ 194,613 $ 140,000 ========= =========
7 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) On February 14, 2003, we entered into a new Credit Agreement (the "Credit Agreement") with Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and certain other lending institutions. The new facility provides term financing of $195 million under term A, term B and term C tranches (the "Term Loans"), a revolving loan facility aggregating $55 million, including a facility for swing line loans of up to $10 million and the issuance of letters of credit in an aggregate amount of up to $40 million. The term A loan is in the original principal amount of $30 million and matures in three years, or February 2006, and requires quarterly interest payments at a rate, at our election, of Libor plus a margin ranging from 3.5% to 4.0% or a base rate plus a margin ranging from 2.25% to 2.75%. These margins are based on certain of our financial ratios. The term B loan is in the original principal amount of $125 million, matures in four years, or February 2007, and requires quarterly interest payments at a rate, at our election, of Libor plus 5.0%, subject to a 2% Libor floor or a base rate plus 3.75%. The term C loan is in the original principal amount of $40 million, matures in five years, or February 2008, and requires quarterly interest payments at a rate, at our election, of Libor plus 7.5%, subject to a 3% Libor floor or a base rate plus 6.25%. The term A and term B loans require quarterly principal payments of 0.25% of the outstanding principal balance. Loans made under the revolving loan facilities, including swing line loans, bear interest at a variable rate, determined on the date of borrowing, that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing. The revolver expires in February 2006. The financing is secured by assets, including equipment, vehicles, multi-client data library, intellectual property, and stock of certain material subsidiaries, owned by us and certain of our subsidiaries. The Credit Agreement and related documents contain a number of covenants, including financial covenants relating to interest coverage, leverage and net worth. On February 14, 2003, the Term Loans totaling $194.6 million were funded and letters of credit in the amount of approximately $5.7 million then outstanding from the previous credit agreement were transferred to the Credit Agreement. Proceeds from the Term Loans were used to satisfy the obligations under the previous credit agreement and the Senior Notes. We incurred $7.3 million of debt issuance costs related to the new Credit Agreement. These costs are capitalized to prepayments and other assets and are being amortized to interest expense over the maturity of the debt. 8. HEDGE TRANSACTIONS 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. On February 25, 2003, we entered into interest rate swaps in order to reduce our exposure to the variable interest rates of the Credit Facility described above. These swaps, with notional amounts totaling $80 million, effectively hedge 41% of our exposure to interest rate changes for the two-year terms of the swaps and had no value at inception. Details of the swaps are summarized in the following table:
Tranche Hedged Amount Term Pay % Receive Libor Floor - -------------- -------------- --------- ---- ------- ----------- (in thousands) Term A $ 25,000 24 months 1.86 Libor None Term B $ 55,000 24 months 2.49 Libor 2%
This is considered a cash flow hedge under FAS 133 for accounting and financial reporting purposes. The two swaps are marked to market with the gain or loss recorded in Other Comprehensive Income offset by an asset or liability. The differences in the amount paid versus amount received each month flows through the income statement as interest expense. The fair value of the swaps on April 30, 2003 was $410,000 and is included in other accrued liabilities on the "Consolidated Balance Sheets". 8 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The values of the kroner contracts and the interest rate swaps are as follows:
APRIL 30, 2003 JULY 31, 2002 ----------------------------------------- ----------------------------------- FORWARD UNREALIZED FORWARD UNREALIZED VALUE GAIN/(LOSS) FAIR VALUE VALUE GAIN FAIR VALUE ------- ----------- ---------- ------- ---------- ---------- (IN THOUSANDS) Forward kroner contracts ....... $ 3,600 $ 908 $ 4,508 $ 6,032 $ 794 $ 6,826 Interest rate swaps ............ (410) (410)
9. 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, 2003 APRIL 30, 2002 ------------------------------------- ------------------------------------- SEGMENTS CORPORATE TOTAL SEGMENTS CORPORATE TOTAL --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Revenues .................................... $ 120,636 $ 120,636 $ 109,267 $ 109,267 Operating income ............................ 22,094 $ (8,280) 13,814 23,339 $ (9,512) 13,827 Income (loss) before provision for income taxes ....................................... 21,558 (13,753) 7,805 24,686 (12,203) 12,483
NINE MONTHS ENDED NINE MONTHS ENDED APRIL 30, 2003 APRIL 30, 2002 ------------------------------------- ------------------------------------- SEGMENTS CORPORATE TOTAL SEGMENTS CORPORATE TOTAL ---------- --------- --------- --------- --------- --------- (IN THOUSANDS) Revenues ......................................... $ 383,464 $ 383,464 $ 350,268 $ 350,268 Operating income ................................. 59,440 $ (25,718) 33,722 72,857 $ (27,687) 45,170 Income (loss) before provision for income taxes .. 57,746 (39,612) 18,134 74,582 (37,043) 37,539
10. SEVERANCE In the first quarter of fiscal year 2003, we began to reduce overhead in all divisions and at all levels of employment. As a result, we incurred $2.8 million of severance cost during the nine months ended April 30, 2003 of which $2.1 million was paid and $0.7 million remains accrued at April 30, 2003. The total expense is included in general and administrative in the "Consolidated Statements of Operations and Comprehensive Income". The total number of employees terminated during the nine months ended April 30, 2003 was 119. The severance liabilities accrued as of April 30, 2003 are expected to be paid over the next nine months. 11. CONTINGENCIES On September 28, 2002, we filed suit in Federal Court against one of our customers in the amount of $6.8 million for failure to pay past due invoices and for other damages. The customer has, in turn, filed a counterclaim against us alleging that the services were not properly performed but did not specify the amount of damages claimed. We believe the facts in the matter are in our favor, however, during our third quarter we reserved $2.9 million of the related receivable in response to a going concern qualification to the audit opinion in the customer's recent Form 10-K filing. We will continue to monitor the financial condition of the customer and, if necessary, adjust the allowance for doubtful accounts to reflect current circumstances. We expect the matter to go to trial in 2004. Our remaining income statement exposure to this issue ranges from $0 to $2.9 million. 9 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 12. STOCK BASED COMPENSATION The effect on net income and earnings per share that would have been recorded using the fair value based method for stock options as required by SFAS 148 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ------------------------------- ------------------------------ 2003 2002 2003 2002 ---------- ------------ ----------- ------------ (IN THOUSANDS) Net income, as reported ........................ $ 4,728 $ 8,045 $ 10,781 $ 23,367 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ............................ (1,783) (1,021) (6,096) (3,429) ---------- ------------ ----------- ------------ Pro forma net income ........................... $ 2,945 $ 7,024 $ 4,685 $ 19,938 ========== ============ =========== ============ Earnings per share: Basic - as reported ............................ $ .14 $ .25 $ .32 $ .72 Basic - pro forma .............................. .09 .22 .14 .61 Diluted - as reported .......................... .14 .25 .32 .72 Diluted - pro forma ............................ .09 .22 .14 .61 Pro forma net income ...........................
10 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 2002 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. GENERAL For the last few years, Veritas has been engaged in a program designed to expand and upgrade the capabilities of the company. Key elements of this program were the outfitting of the three Viking-class vessels, installation of large computer clusters, and the addition of Arctic-capable land acquisition equipment. These investments are now paying off in terms of increased acceptance in the market. Veritas will continue to invest in its core businesses, especially in assets that advance our technological position. However, in the current market we do not expect to invest significant amounts to expand our overall capacity. We are continuing to selectively invest in our multi-client library where we can reasonably assume adequate returns. However, we balance our investment in multi-client libraries with our participation in the contract, or proprietary, market. In 2003, we are increasing our participation in the contract marine acquisition market, with a commensurate reduction in marine multi-client investment. We anticipate this will result in increased cash flow, although potentially at the expense of a lower gross margin. Based on this environment, for fiscal year 2003, we expect capital expenditures will be approximately $30 to $35 million, less than half of the expected depreciation level, and cash investment in our multi-client library will be approximately $160 million, significantly less than projected multi-client revenue. These factors, along with expense reductions and expected revenues, are projected to result in positive free cash flow for the year. (See Liquidity and Capital Resources on page 13 for our definition of free cash flow and further explanation.) RESULTS OF OPERATIONS THREE MONTHS ENDED APRIL 30, 2003 COMPARED WITH THREE MONTHS ENDED APRIL 30, 2002 Revenues. Revenues increased by 10% overall. Multi-client revenue decreased 3% primarily due to lower sales of completed surveys in West Africa and offshore Canada. Additionally, in the prior year we had two vessels working on a highly funded survey in Brazil. These decreases were partially offset by increased activity in Canada where a large sale of Rocky Mountain foothills data contributed significantly to the quarter. Contract revenue increased by 23%. Land acquisition revenue increased due to activity in the U.S., a new contract in Bolivia and re-entry into the Argentine market. Marine acquisition revenue increased due to a project in Trinidad. Operating income. Operating income as a percentage of revenue decreased to 11.5% from 12.7% mainly as a result of a $2.9 million provision related to a disputed receivable from a customer. Contract margins increased but were partially offset by lower multi-client margins as a result of an unfavorable mix of survey licenses. On September 28, 2002, we filed suit in Federal Court against one of our customers in the amount of $6.8 million for failure to pay past due invoices and for other damages. The customer has, in turn, filed a counterclaim against us alleging that the services were not properly performed but did not specify the amount of damages claimed. We believe the facts in the matter are in our favor, however, during our third quarter we reserved $2.9 million of the related receivable in response to a going concern qualification to the audit opinion in the customer's recent Form 10-K filing. We will continue to monitor the financial condition of the customer and, if necessary, adjust the allowance for doubtful accounts to reflect current circumstances. We expect the matter to go to trial in 2004. 11 Other expense (income), net. Other expense (income), net decreased from income of $1.4 million to an expense of $17,000. This was mainly due to the prior year recovery of a $1.3 million currency loss in Argentina. In addition, our unconsolidated Indonesian joint venture incurred a loss of $210,000 as opposed to income in the prior year of $0.3 million, and net losses from the sale of fixed assets increased from $38,000 to $0.2 million. These were offset by an increase in interest income from $0.2 million to $0.5 million due to increased borrowings and increased cash from operations in the current quarter as compared to the prior year's quarter. Interest expense. Interest expense increased from $2.8 million to $6.0 million. Our previous outstanding debt, Senior Notes and the revolving credit facility, and the new bank debt were concurrently outstanding for one month, resulting in additional interest costs of $1.2 million, In addition, we expensed $0.7 million of unamortized debt issuance costs related to the refinanced facilities. Outstanding borrowings were $194.6 million under the new facility compared with $135.0 million outstanding in prior year's third quarter. These factors were partially offset by the new Credit Agreement's weighted-average borrowing cost of approximately 8%, compared with 9.75% under the Senior Notes. Management expects interest expense to be in the $4.0 to $4.5 million range in each of the next few quarters. Provision for income taxes. The provision for income taxes decreased from $4.4 million to $3.1 million as a result of a decrease in earnings in the current year. The effective income tax rate increased from 36% to 39% as a result of unbenefited losses and foreign tax credits generated in certain jurisdictions. NINE MONTHS ENDED APRIL 30, 2003 COMPARED WITH NINE MONTHS ENDED APRIL 30, 2002 Revenues. Revenues increased by 9% overall. Multi-client revenue was comparable to the previous year's nine month period. Marine multi-client revenue decreased by 4% due to lower sales of completed surveys, while land multi-client revenue increased due to higher sales of Canadian foothills data. Contract revenue increased by 18% due to a large land acquisition project in Peru, increased land activity in the U.S., re-entry into the Argentina land market and an increase in marine acquisition projects. This was partially offset by decreased activity in Canada land acquisition due to warmer than normal weather, that delayed equipment movement during the winter season. Operating income. Operating income as a percentage of revenue decreased to 8.8% from 12.9%. Although contract margins increased due to higher pricing and project mix, overall margins declined due to several operational disruptions in land acquisition in the first quarter of the current year, lower margins from multi-client revenue caused by a greater mix of lower margin surveys and a $2.9 million provision for doubtful accounts. The operational disruptions included two lightning strikes, two hurricanes, and civil unrest, all of which resulted in declarations of contractual force majeur provisions. Reduced revenue and increased expense associated with these projects reduced operating income by approximately $2.1 million. Additionally, we recognized an impairment of $1.8 million of assets in the land acquisition business. On September 28, 2002, we filed suit in Federal Court against one of our customers in the amount of $6.8 million for failure to pay past due invoices and for other damages. The customer has, in turn, filed a counterclaim against us alleging that the services were not properly performed but did not specify the amount of damages claimed. We believe the facts in the matter are in our favor, however, during our third quarter we reserved $2.9 million of the related receivable in response to a going concern qualification to the audit opinion in the customer's recent Form 10-K filing. We will continue to monitor the financial condition of the customer and, if necessary, adjust the allowance for doubtful accounts to reflect current circumstances. We expect the matter to go to trial in 2004. General and administrative expense increased by $3.9 million from the prior year due to severance and other items. Other expense (income), net. Other expense (income), net decreased from income of $2.2 million to a loss of $1.2 million due to several factors. The prior year's results included a $0.7 million gain from the sale of a seismic drilling operation. Net loss from foreign currency increased from $0.3 million to $0.7 million. Interest income decreased from $1.3 million to $0.3 million due to lower cash in the first half of the current year as compared to the prior year. Our unconsolidated joint venture in Indonesia incurred a loss of $1.2 million compared to income of $0.3 million in the prior year. 12 Interest expense. Interest expense increased from $9.9 million to $14.4 million. During the first half of the current fiscal year, interest expense increased due to additional borrowing on our revolving credit facility. In the third quarter of the current year, our previous outstanding debt, Senior Notes and the revolving credit facility, and the new bank debt were concurrently outstanding for one month, resulting in additional interest costs of $1.2 million, In addition, we expensed $0.7 million of unamortized debt issuance costs related to the refinanced facilities. Outstanding borrowings were $194.6 million under the new facility compared with $135.0 million outstanding in prior year's third quarter. These factors were partially offset by the new credit facility's weighted-average borrowing cost of approximately 8%, compared with 9.75% under the Senior Notes. Provision for income taxes. The provision for income taxes decreased from $14.2 million to $7.4 million as a result of a decrease in earnings in the current year. The effective income tax rate increased from 38% to 41% as a result of unbenefited losses in certain foreign jurisdictions. LIQUIDITY AND CAPITAL RESOURCES SOURCES AND USES Our internal sources of liquidity are cash, cash equivalents and cash flow from operations. External sources include public financing, equity sales, equipment financing, our revolving loan facility, and trade credit. We believe these sources of funds are adequate to meet our liquidity needs for fiscal 2003 and 2004. Net cash provided by operating activities increased from $148.4 million in the first nine months of 2002 to $162.1 million in 2003. Major components of this change were a $17.2 million increase in amortization on multi-client library due to higher cost of sales from new survey sales and increased amortization on remaining costs for surveys reaching their three-year completion period. In addition, depreciation and amortization, net increased by $6.0 million as a result of amortization on Hampson-Russell software and decreased depreciation capitalized to multi-client library. These increases were offset by a $12.6 million decrease in net income and an unfavorable change in operating assets and liabilities of $1.4 million. Net cash used by investing activities decreased from $194.6 million in the first nine months of 2002 to $149.3 million in 2003 due to lower capital spending and investments in multi-client library, partially offset by the acquisition of Hampson-Russell. Our capital expenditure estimate for fiscal 2003 is approximately $30 to $35 million, which is mostly allocated to the replacement and upgrading of existing equipment. For fiscal year 2003, we are forecasting $150 to $160 million of cash investment in our data library. We expect to fund these investments from internally generated cash flows. Net cash provided by financing activities increased from $2.1 million in the first nine months of 2002 to $49.4 million in 2003. This increase was driven by a new financing package that provides us with greater liquidity at a lower interest rate than we previously had and gives us a pre-payment option in the future. On February 14, 2003, we entered into a new Credit Agreement (the "Credit Agreement") with Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and certain other lending institutions. The new facility provides term financing of $195 million under term A, term B and term C tranches (the "Term Loans"), a revolving loan facility aggregating $55 million, including a facility for swing line loans of up to $10 million and the issuance of letters of credit in an aggregate amount of up to $40 million. Proceeds from the Term Loans were used to satisfy the obligations under the previous credit agreement and the Senior Notes. In addition, the current year includes net payments on the revolving credit facility of $5.0 million, redemption of the Senior Notes of $135.0 million, and payments under the new Credit Agreement of $0.4 million. We use free cash flow as an important metric within the company as it measures the combined effects of our operational performance and our investing discipline on the liquidity of the company. For the nine months of the current fiscal year to date we have generated $20.0 million of free cash flow versus a negative $50.7 million of free cash flow for the same period of the prior fiscal year. The large positive change in free cash flow is primarily due to decreased capital spending in the current year and, to a lesser extent, lower spending on multi-client surveys. We expect to maintain the reduced capital spending levels through the end of the fiscal year and, in total, plan to spend $56 million less than in the prior year. 13 We define free cash flow as cash from operating activities less cash multi-client spending and capital expenditures. This non-GAAP liquidity measure is useful as an addition to the most directly comparable GAAP measure of "cash provided by operating activities" because free cash flow includes investments in operational assets and therefore presents a fuller picture of net cash flow from ongoing operations. This measure excludes items such as proceeds from the disposal of assets, cash paid for acquisitions and all financing activities. A reconciliation of free cash flow to cash provided by operating activities is presented in the following table.
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (IN THOUSANDS) Free cash flow .............................. $ 15,775 $ (3,356) $ 19,960 $ (50,726) Add back: Multi-client expenditures, net cash ......... 47,065 38,674 122,652 127,054 Capital expenditures ........................ 6,563 20,455 19,530 72,060 --------- --------- --------- --------- Total cash provided by operating activities.. $ 69,403 $ 55,773 $ 162,142 $ 148,388
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 the external factors of exploration spending and, ultimately, underlying commodity prices. The following represents our financial contractual obligations and commitments for the fiscal period ending July 31, 2003 through 2007 and thereafter.
2007 AND CONTRACTUAL CASH OBLIGATIONS TOTAL 2003 2004 2005 2006 THEREAFTER ---------------------------- ----- ---- ---- ---- ---- ---------- Lease obligations .......................... $ 160,329 $ 41,710 $ 30,738 $ 23,963 $ 19,932 $ 43,986 Long-term debt ............................. 194,613 387 1,537 1,521 30,473 160,695 Forward exchange contracts ................. 6,832 800 3,253 2,779 Standby letters of credit .................. 5,733 365 5,275 93
CRITICAL ACCOUNTING POLICIES While all of our accounting policies are important in assuring that Veritas adheres to current accounting standards, certain policies are particularly important due to their impact on our financial statements. These are described in detail below. MULTI-CLIENT DATA LIBRARY In the portion of our business known as multi-client data library, we collect and process geophysical data for our own account and retain all ownership rights. We license the data to multiple clients on a non-transferable basis. We capitalize the costs associated with acquiring and processing the multi-client data on a survey-by-survey basis (versus a pooled basis). The capitalized cost of multi-client data is charged to cost of services in the period revenue is recognized in an amount equal to the period revenue multiplied by the percentage of total estimated costs to total estimated revenue. Therefore, multi-client margins recognized in any given period are the product of estimated costs and estimated sales and may not reflect the ultimate cash margins recognized from a survey. Any costs remaining 36 months after completion of a survey are charged to cost of services over a period not to exceed 24 months. The maximum amortization period of sixty months represents the period over which the majority of revenues from these surveys are expected to be derived. We periodically review the carrying value of the multi-client data library to assess whether there has been a permanent impairment of value and then record losses when it is determined that estimated sales will not be sufficient to cover the carrying value of the asset. 14 DEFERRED TAX ASSET Deferred taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. 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 carry-forwards, with equal and offsetting adjustments to the related deferred tax asset. Should the 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. SOFTWARE CAPITALIZATION AND AMORTIZATION Software available for sale is included in other assets. Software acquired through the purchase of software companies is capitalized at estimated fair market value through allocation of the purchase price. For internally developed software, we capitalize costs associated with the development of the product from the time the product reaches technological feasibility until it is ready for commercial release. The capitalized cost of the software, whether developed or purchased, is charged to cost of services in the period sales occur based on the percentage of total cost to total estimated sales multiplied by actual sales during the period. The period of amortization begins when the software is released to the market. In no case is the cumulative amortization for a product allowed to fall below the amount that would be recorded using straight-line amortization for that product's estimated useful life. Estimated useful lives of our software products range from three to five years. OTHER ACCOUNTING POLICIES Since our quasi-reorganization on July 31, 1991 with respect to Digicon Inc., 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 carry-forwards existing at the date of the quasi-reorganization is subject to certain limitations. For the nine months ended April 30, 2003, we recognized $1.8 million related to these benefits. We receive some account receivable payments in foreign currency. We currently do not conduct a hedging program for these receivables because we do not consider our current exposure to foreign currency fluctuations to be significant, although we have hedged certain future charter payments to be made in a foreign currency. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143 (Asset Retirement Obligations). This standard requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred with the liability being initially measured at fair value. We adopted the use of this accounting statement in August 2002. Adoption did not have a material effect on our financial position or results of operations. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144 (Accounting for the Impairment or Disposal of Long Lived Assets). This standard develops one accounting model for long-lived assets that are to be disposed of by sale, requiring such assets to be measured at the lower of book value or fair value less cost to sell. The standard also provides guidance on the recognition of liabilities for the obligations arising from disposal activities. We adopted the use of this accounting statement in August 2002. Adoption did not have a material effect on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145 (Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002). Among other things, this statement addresses how to report gains or losses resulting from the early extinguishment of debt. Previously, any gains or losses were reported as an extraordinary item. Upon adoption of SFAS No. 145, an entity is required to evaluate whether the debt extinguishment is truly extraordinary in nature, in accordance with Accounting Principles Board Opinion No. 30. We adopted the use of this accounting statement in August 2002. The adoption of this statement will likely preclude extraordinary classification of costs related to early debt extinguishment, and the effect of adoption was immaterial. 15 In July 2002, the Financial Accounting Standards Board issued SFAS No. 146 (Accounting for Costs Associated with Exit or Disposal Activities). This standard requires recognition of costs associated with exit or disposal activities when they are incurred rather than when management commits to an exit or disposal plan. Examples of costs covered by this guidance include lease termination costs, employee severance costs that are associated with restructuring, discontinued operations, plant closings, or other exit or disposal activities. We adopted the use of this accounting statement for all activities initiated after December 31, 2002. Adoption did not have a material effect on our financial position or results of operations. In December 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements. FIN 45 expands required disclosures for certain types of guarantees and recognition of a liability at fair value of such guarantees at the time of issuance. The disclosure requirements are effective for our second fiscal quarter financial statements, while the fair value accounting requirements apply prospectively to guarantees issued or modified after December 31, 2002. Adoption of FIN 45 did not have a material effect on our financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 amended ARB 51, Consolidated Financial Statements, and established standards for determining under what circumstances a variable interest entity (VIE) should be consolidated with its primary beneficiary. FIN 46 also requires disclosures about VIEs that the company is not required to consolidate, but in which it has a significant variable interest. Adoption of FIN 46 did not have a material effect on our financial position or results of operations. In January 2003, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the use of this accounting statement in January 2003. Adoption did not have a material effect on our financial position or results of operations. We have no plans to voluntarily expense stock options or change our current stock-based compensation program. We have included the required interim disclosures in Note 12, Stock Based Compensation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK At April 30, 2003, we had limited market risk related to foreign currencies. 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 fixing our exchange rates for Norwegian kroner to the U.S. dollar. The total fair value of the open forward contracts at April 30, 2003 in U.S. dollars was $4.5 million. As of February 14, 2003, with the signing of the new Credit Agreement, we are exposed to interest rate risk based upon fluctuations in the Libor rate. To partially mitigate this risk, on February 25, 2003 we entered into interest rate swaps in the notional amount of $80 million, effectively hedging 41% of our exposure to interest rate fluctuations for the two-year terms of the swaps. The swaps had no value at inception. Details of the swaps are summarized in the following table:
Tranche Hedged Amount Term Pay % Receive Libor Floor - -------------- -------------- --------- ---- ------- ----------- (in thousands) Term A $ 25,000 24 months 1.86 Libor None Term B $ 55,000 24 months 2.49 Libor 2%
The fair value of the swaps on April 30, 2003 was $410,000 and is included in other accrued liabilities on the "Consolidated Balance Sheets". 16 ITEM 4. CONTROLS AND PROCEDURES Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures within ninety days of the filing of this report pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission (SEC) rules and forms. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date our management, including its Chief Executive Officer and Chief Financial Officer, completed its evaluation. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On September 28, 2002, we filed suit in Federal Court against one of our customers in the amount of $6.8 million for failure to pay past due invoices and for other damages. The customer has, in turn, filed a counterclaim against us alleging that the services were not properly performed but did not specify the amount of damages claimed. We believe the facts in the matter are in our favor, however, during our third quarter we reserved $2.9 million of the related receivable in response to a going concern qualification to the audit opinion in the customer's recent Form 10-K filing. We will continue to monitor the financial condition of the customer and, if necessary, adjust the allowance for doubtful accounts to reflect current circumstances. We expect the matter to go to trial in 2004. Our remaining income statement exposure to this issue ranges from $0 to $2.9 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS FILED WITH THIS REPORT:
EXHIBIT NO. DESCRIPTION - ------- ------------ 10.1 -- Credit Agreement among Veritas DGC Inc., as borrower, and Wells Fargo, Inc., as a bank and agent for the banks named therein, dated July 19, 2001. (Exhibit 10-W to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 2001 is incorporated herein by reference.) 10.2 -- Second Amendment to Credit Agreement, effective as of July 1, 2002, by and among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy Services Inc., Veritas Energy Services Partnership, certain Banks party thereto, Wells Fargo Bank Texas, N.A., as agent, and HSBC Bank Canada, as agent. (Exhibit 10.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 27, 2002 is incorporated herein by reference.) 10.3 -- Credit Agreement, dated as of February 14, 2003, among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy Services Inc., Veritas Energy Services Partnership, Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and the various lending institutions named therein. (Exhibit 10.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated February 19, 2003 is incorporated herein by reference.)
17 10.4 -- Letter of Agreement between Veritas DGC Inc. and Anthony Tripodo dated November 8, 2002 (Exhibit 10.4 to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 2003 is incorporated herein by reference.) *10.5 -- Agreement and Release of All Claims dated April 23, 2003, between Veritas DGC Inc. and Anthony Tripodo. *10.6 -- Consulting Services Agreement dated effective May 1, 2003 by and between Veritas DGC Inc. and Arch Creek Advisors LLC. (Arch Creek Advisors LLC is owned and controlled by Anthony Tripodo, who, until April 30, 2003, was Executive Vice President, Special Projects of Veritas DGC Inc. and prior to that, was Executive Vice President, Chief Financial Officer & Treasurer of the Veritas DGC Inc.) *99.1 -- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David B. Robson. *99.2 -- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Matthew D. Fitzgerald.
* filed herewith b) REPORTS ON FORM 8-K On February 5, 2003, we filed a report under Item 5 on Form 8-K regarding the anticipated redemption of our 9 3/4 Senior Notes. On February 19, 2003, we filed a report under Item 5 on Form 8-K regarding our credit agreement with Deutsche Bank AG. On May 30, 2003, we filed a Form 8-K regarding our earnings release conference call for our 3rd Quarter, 2003. 18 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 2003. VERITAS DGC INC. By: /s/ David B. Robson ------------------------------------------------- DAVID B. ROBSON Chairman of the Board and Chief Executive Officer /s/ Matthew D. Fitzgerald ------------------------------------------------- MATTHEW D. FITZGERALD Executive Vice President, Chief Financial Officer and Treasurer 19 CERTIFICATIONS I, David B. Robson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Veritas DGC Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 13, 2003 /s/ David B. Robson ------------------- David B. Robson Chief Executive Officer 20 CERTIFICATIONS I, Matthew D. Fitzgerald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Veritas DGC Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 13, 2003 /s/ Matthew D. Fitzgerald ------------------------- Matthew D. Fitzgerald Chief Financial Officer 21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ------------ 10.1 -- Credit Agreement among Veritas DGC Inc., as borrower, and Wells Fargo, Inc., as a bank and agent for the banks named therein, dated July 19, 2001. (Exhibit 10-W to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 2001 is incorporated herein by reference.) 10.2 -- Second Amendment to Credit Agreement, effective as of July 1, 2002, by and among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy Services Inc., Veritas Energy Services Partnership, certain Banks party thereto, Wells Fargo Bank Texas, N.A., as agent, and HSBC Bank Canada, as agent. (Exhibit 10.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 27, 2002 is incorporated herein by reference.) 10.3 -- Credit Agreement, dated as of February 14, 2003, among Veritas DGC Inc., Veritas DGC Limited, Veritas Energy Services Inc., Veritas Energy Services Partnership, Deutsche Bank AG, New York Branch, as Administrative Agent, Deutsche Bank AG, Canada Branch, as Canadian Administrative Agent, and the various lending institutions named therein. (Exhibit 10.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated February 19, 2003 is incorporated herein by reference.)
10.4 -- Letter of Agreement between Veritas DGC Inc. and Anthony Tripodo dated November 8, 2002 (Exhibit 10.4 to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 2003 is incorporated herein by reference.) *10.5 -- Agreement and Release of All Claims dated April 23, 2003, between Veritas DGC Inc. and Anthony Tripodo. *10.6 -- Consulting Services Agreement dated effective May 1, 2003 by and between Veritas DGC Inc. and Arch Creek Advisors LLC. (Arch Creek Advisors LLC is owned and controlled by Anthony Tripodo, who, until April 30, 2003, was Executive Vice President, Special Projects of Veritas DGC Inc. and prior to that, was Executive Vice President, Chief Financial Officer & Treasurer of the Veritas DGC Inc.) *99.1 -- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by David B. Robson. *99.2 -- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Matthew D. Fitzgerald.
* filed herewith EX-10.5 3 h06771exv10w5.txt AGREEMENT & RELEASE OF ALL CLAIMS EXHIBIT 10.5 AGREEMENT AND RELEASE OF ALL CLAIMS This Agreement, entered into as of the date written by Employee's signature below, is by and between Veritas DGC Inc. ("Veritas"), a Delaware corporation, and Anthony Tripodo ("Employee"). (As used in this Agreement, the term "Veritas" includes Veritas DGC Inc., and all of its subsidiary and affiliated companies). Veritas and Employee agree as follows: Section 1. Within 5 business days after the Separation Date, as defined in Section 3 below, and whether or not Employee executes and returns this Agreement, Veritas will pay Employee the following amounts: - Employee's regular base salary prorated through the Separation Date; - Employee's vacation pay accrued as of the Separation Date; and - any expense reimbursement owed to Employee under Veritas policy. All of the above amounts will be REDUCED by applicable taxes and withholding. Section 2. Within 30 calendar days after the Effective Date, as defined in Section 15 below, Veritas will pay to Employee a lump sum equal to $496,240, which amount represents payment of the following: - two years' salary of $240,000 per year [Veritas elects to pay this amount to Employee in a lump sum in accordance with to Section 6(d)(3) of the Amended and Restated Employment Agreement by and between Veritas and Employee effective October 22, 2001, as amended by Amendment No. 1 to Amended and Restated Employment Agreement effective November 14, 2001 (collectively, the "Employment Agreement")]; plus - a lump sum payment of $16,240 in lieu of providing Employee's medical, dental, health, and hospital coverage [Veritas elects to pay this amount in a lump sum in accordance with Section 6(d)(4)(ii) of the Employment Agreement)]. The lump sum amount paid in accordance with this Section 2 will be REDUCED by applicable taxes and withholding. Section 3. Employee's termination from employment will be effective at the close of business on the Separation Date. The SEPARATION DATE as used in this Agreement means April 30, 2003. Section 4. Employee agrees to release Veritas from any claims he has or may have against Veritas as of the date he signs this Agreement. The claims he is releasing include all of the following: - any claims under any bonus or incentive plans; - any claims for tortious action or inaction of any sort ("tortious action or inaction" means, among other things, claims for such things as negligence, fraud, libel, or slander); - any claims arising under the Age Discrimination in Employment Act of 1967 as amended (29 U.S.C. Section 621, et seq.) (the Age Discrimination in Employment Act of 1967 prohibits, in general, discrimination against employees on the basis of age); - any claims arising under Title VII of the Civil Rights Act of 1964 as amended (42 U.S.C. Section 2000e, et seq.), or the Texas Commission on Human Rights Act (Texas Labor Code Section 21.001, et seq.) (both of these statutes, in general, prohibit discrimination in employment on the basis of race, religion, national origin or gender); - any claims arising under the Americans with Disabilities Act of 1990, as amended (42 U.S.C. Section 12101, et seq.) (the Americans with Disabilities Act of 1990 prohibits, in general, discrimination in employment on the basis of an employee's or applicant's disability); - any claims arising under Texas Labor Code Sections 451.001, et seq. for retaliation or discrimination in connection with a claim for workers' compensation benefits; and, - any claims for breach of contract, wrongful discharge, constructive discharge, retaliation, or conspiracy. The release contained in this Section 4 WILL NOT affect any of the following: - Any claim by Employee under this Agreement; - Employee's rights or benefits under Veritas' 401(k) retirement savings plan, Veritas' Employee Stock Purchase Plan, or any pension or retirement plan in which Employee is a participant on the Separation Date (Employee's rights and benefits will be determined by the applicable plan documents); - Employee's right to elect continued health and/or dental benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); - Employee's right to exercise any options to purchase Veritas DGC Inc. common stock in accordance with the terms of the applicable stock option grant, including any terms of the grant modified by Section 6(e)(5) of the Employment Agreement; - Employee's rights under any restricted stock agreement between Employee and Veritas DGC Inc. under the terms of which Employee has been granted Veritas DGC Inc. restricted stock, including any terms of the grant modified by Section 6(e)(5) of the Employment Agreement; - Employee's right to claim and receive reimbursement for or indemnity from excise taxes in accordance with Section 7 of the Employment Agreement; - Employee's rights to indemnity under that one certain Indemnity Agreement effective March 7, 2000, by and between Employer and Employee; - Any other benefit to which Employee may be entitled under any other health or benefit plan in accordance with the applicable plan documents; or - Employee's rights under any workers' compensation statue; the Jones Act, 46 U.S.C. Appx. Section 688, as amended; general maritime law or similar laws; and any other right Employee may have with respect to bodily injury. Section 5. Veritas and Employee agree that this Agreement is a binding contract. The purpose of the Agreement is to compromise doubtful or disputed claims, avoid litigation, and buy peace. Employee agrees that although Veritas is making payment to Employee in exchange for a release of claims, Veritas does not admit any wrongdoing of any kind. Section 6. Employee agrees to assist Veritas in defending any legal proceedings against Veritas arising out of matters that occurred on or prior to the Separation Date. Veritas agrees to reimburse Employee for his time and expense or costs he may incur in that regard. Section 7. Employee confirms that after the Effective Date he remains subject to and agrees to comply with: - those obligations of confidentiality contained in Section 3(b) and 3(c) of the Employment Agreement; - the provisions relating to competition with Employer contained in Section 12 of the Employment Agreement; - the provisions relating to solicitation or hiring of Employer's employees contained in Section 12 of the Employment Agreement; and - the terms of the Employee Confidentiality and Intellectual Property Agreement with Employer which Employee signed effective October 22, 2001. Section 8. This Agreement has been delivered to Employee on April 21, 2003. - Employee will have 21 calendar days from April 21, 2003 or until the close of business on May 12, 2003 to decide whether to sign and return this Agreement and be bound by its terms. In the event Employee has not signed and returned this Agreement to Veritas on or before May 12, 2003, this Agreement will become null and void. - Veritas and Employee agree that if they agree to change the terms of this Agreement in any manner after it is delivered to Employee, even if the changes are material, the 21-day period specified in the previous paragraph will not restart or be extended. - After signing this Agreement, Employee will have the right to revoke the Agreement for a period of 7 calendar days after signing it by (a) notifying Veritas in writing that Employee revokes the Agreement and (b) returning to Veritas any consideration paid Employee under Section 2 above. In the event Employee revokes the Agreement, it will become null and void. Section 9. Employee acknowledges that he has read this Agreement. He understands that, except for the exceptions set out in Section 4 above, this Agreement will have the effect of waiving any claim he may pursue against Veritas. Section 10. Employee acknowledges that he makes this Agreement knowingly and voluntarily. Section 11. This Agreement constitutes the entire understanding between Veritas and Employee with respect to the subject matter hereof. Section 12. This Agreement will benefit and be binding upon Veritas and its successors and assigns and Employee and his successors and legal representatives. Employee will not assign or attempt to assign any of his rights under this Agreement. Section 13. If a court determines that any provision of this Agreement is invalid, the other provisions will remain in effect. Section 14. This Agreement will be governed by, construed under, and enforced in accordance with the laws of the State of Texas, not including, however, its conflicts of law rules that might otherwise refer to the law of another forum or jurisdiction. Section 15. This Agreement will become effective and enforceable only after a period of 7 days has expired following Employee's execution and delivery of this Agreement to Veritas (this date is referred to in this Agreement as the "EFFECTIVE DATE"). THIS AGREEMENT IS SUBJECT TO ARBITRATION IN ACCORDANCE WITH THE FOLLOWING SECTION Section 16. Employer and Employee agree to submit to final and binding arbitration any and all disputes or disagreements concerning the interpretation or application of this Agreement. Any such dispute or disagreement will be resolved by arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (the "AAA Rules"). Arbitration will take place in Houston, Texas, unless the parties mutually agree to a different location. Within 30 calendar days of the initiation of arbitration hereunder, each party will designate an arbitrator. The appointed arbitrators will then appoint a third arbitrator. Employee and Employer agree that the decision of the arbitrators will be final and binding on both parties. Any court having jurisdiction may enter a judgment upon the award rendered by the arbitrators. In the event the arbitration is decided in whole or in part in favor of Employee, Employer will reimburse Employee for his reasonable costs and expenses of the arbitration (including reasonable attorneys' fees). Regardless of the outcome of any arbitration, Employer will pay all fees and expenses of the arbitrators and all of Employer's costs of such arbitration. Notwithstanding the provisions of the previous paragraph, Employer may, if it so chooses, bring an action in any court of competent jurisdiction for injunctive relief to enforce those obligations of Employee referred to in Section 7 of this Agreement. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the Effective Date. VERITAS: VERITAS DGC INC. and subsidiary and affiliated companies By: /s/ T. Scott Smith -------------------------------------- T. Scott Smith Vice President of Human Resources NOTICE TO EMPLOYEE BY SIGNING THIS DOCUMENT, YOU MAY BE GIVING UP IMPORTANT LEGAL RIGHTS. YOU ARE ADVISED TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING AND RETURNING THIS DOCUMENT TO VERITAS. EMPLOYEE: /s/ Anthony Tripodo ------------------------------------------ Anthony Tripodo Date: April 23, 2003 EX-10.6 4 h06771exv10w6.txt CONSULTING SERVICES AGREEMENT EXHIBIT 10.6 CONSULTING AND SERVICES AGREEMENT THIS AGREEMENT made this 1st day of May 2003, BETWEEN: ARCH CREEK ADVISORS LLC, a limited liability company formed under the laws of the State of Texas (hereinafter referred to as "Consultant") - and - VERITAS DGC INC., a Delaware Corporation (hereinafter referred to as the "Company") WHEREAS, Company wishes to retain the Consultant to provide certain services as hereinafter specified; and WHEREAS, the Consultant has agreed to provide these services; NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, THE PARTIES MUTUALLY COVENANT AND AGREE AS FOLLOWS: 1. ENGAGEMENT 1.1 Company agrees to engage the Consultant to provide certain services as specified herein and the Consultant agrees to provide such services pursuant to the terms of this Agreement. Consultant has also agreed to provide the services exclusively through its principal, Anthony Tripodo. 2. CONSULTANT'S SERVICES 2.1 The Consultant shall provide to Company the following services (the "Consulting Services") and will report jointly to and take directions or instructions as required from the officers of Company or their replacements from time to time. The Consultant shall from time to time and, subject to Section 5, at its own cost (except as to reasonable travel expenses), provide to Company general consultation and advice in regard to finance and business strategy. The specific nature and scope of such consultation and advice shall be as agreed to by the parties from time to time acting reasonably and shall include, without limitation, consultation and advice with respect to: (a) Analysis and evaluation of potential strategic transactions. As directed by either the Chairman & Chief Executive Officer ("CEO"), the President or the CFO of Company, perform research, analysis and evaluation of potential strategic transactions and present the results of such work. As directed, work in conjunction with other external advisors of Company. (b) Presentation of strategic transactions. Routinely research and analyze other companies and businesses involved in the geophysical services industry and related industries and present potential business opportunities to the Chairman & CEO or his designees. In the course of making contact with representatives of third party companies and businesses, as well as research analysts, Consultant will make it known that it is acting as an independent consultant to Company. (c) Research and information services. On a schedule to be determined by the Chairman & CEO of Company, Consultant will brief the Chairman & CEO and such other persons as the Chairman & CEO shall choose, regarding all information gathered on the geophysical services industry and related industries. (d) Training of Company personnel. As directed and if requested by the Chairman & CEO, Consultant will train a designated Company employee in business valuation techniques as they relate to mergers and acquisitions. Provide the designated individual with both theoretical educational content as well as the application of such to practical potential strategic acquisitions/mergers. As directed, work with this individual on any merger and acquisition projects assigned. (e) Potential Optional Services. If requested to do so by the Chairman & CEO, Consultant will participate in the negotiation of specific transactions or carry out such other special projects involving the use of Consultant's financial expertise as the Chairman & CEO may assign. 3. INDEPENDENT CONTRACTOR 3.1 The Consultant shall at all times be an independent contractor and no oral agreement or anything in this Agreement shall be construed as creating a partnership, joint venture or employer/employee relationship. Notwithstanding the instructions or directions given to the Consultant herein, the Consultant shall have the right to determine the manner and methods to best implement or carry out such instructions. 3.2 Except where expressly authorized by Company, neither the Consultant nor any of its employees shall have the authority to make any statements, representations or commitments of any kind, or take any action, which shall be binding upon Company or its subsidiaries or affiliates. 4. CONSULTANT'S REPRESENTATIONS 4.1 The Consultant shall perform the Consulting Services in accordance with generally available and accepted methods, standards and practices and the Consultant shall obey all applicable laws, regulations, rules and standards imposed by the appropriate government authorities with respect to provision of the Consulting Services. 5. TERM 5.1 The term of this agreement shall be for one (1) year, commencing as of May 1, 2003 and continuing until April 30, 2004, unless sooner terminated pursuant to the terms hereof. Consulting and Services Agreement Page -2- Thereafter, the parties may elect, but shall have no obligation, to renew this Agreement for an additional term. Any such renewal shall be in writing signed by both parties. 6. TERMINATION 6.1 The Company shall have the right to terminate this Agreement at any time for cause in the event that the Consultant commits a material breach of this Agreement, commits any wrongful or negligent acts or omissions, or fails to perform the Services substantially in accordance with the requirements of the Company, as reasonably determined by the Company. 6.2 Upon termination of this Agreement, the Company will have no obligation to pay any amount to the Consultant other than amounts earned or accrued as of the Date of Termination. In the event of death or disability of the Consultant's principal, Anthony Tripodo, during the term of this Agreement, this Agreement shall immediately terminate and the accrued compensation will be paid to the Consultant through the date of such death or disability. 7. COMPENSATION AND EXPENSE REIMBURSEMENT 7.1 As compensation for the Services contemplated herein, Company agrees to pay Consultant ten thousand dollars ($10,000) per month payable in arrears. Company will pay Consultant such amount once each month on or before the fifth day following the end of each month. 7.2 Company shall reimburse the Consultant for reasonable travel expenses only according to Company's expense reimbursement policy, provided that (i) all travel is approved in advance and (ii) appropriate backup documentation verifying the expenses is submitted to Company with the invoice for payment. The Company will reimburse no other expenses to Consultant. Not more often than once each month, Consultant will invoice Company for travel expenses and will provide appropriate documentation with each invoice. Company will pay such invoices within fifteen (15) days. Payment of any invoice shall not prejudice the right of Company to protest or question the correctness thereof. In the event of a dispute as related to any of Consultant's invoices, the parties will attempt to negotiate the dispute and if no resolution is achieved, then the parties will proceed under the dispute resolution procedures provided for in this Agreement. 7.3 Consultant expressly acknowledges that as an independent contractor it is not entitled to receive from Company any form of remuneration or benefits whatsoever other than as expressly stated above. Company is not obligated nor shall it make any deductions or withholdings from remuneration paid to the Consultant under this Agreement. Consultant further acknowledges that it alone is responsible for remitting all payments under the applicable tax laws or as otherwise required by law. 7.4 Consultant shall not be eligible for any vacation or vacation benefits from Company or to otherwise participate in any of Company's employee benefits programs including but not limited to disability, health or pension programs; provision of such benefits for the personnel and employees of the Consultant shall be the sole responsibility of the Consultant. Consulting and Services Agreement Page -3- 8. INDEMNIFICATION AND RESPONSIBILITY 8.1 Consultant shall protect, indemnify, defend and save harmless Company, its officers and directors, its affiliated companies, their agents and employees of any of them from and against all claims, costs (including reasonable attorneys' fees), liabilities, demands, causes of action and judgments in favor of or asserted by Consultant, its subcontractors, agents or representatives, or employees of any of them on account of personal injury or death or on account of damage to property of Consultant, its subcontractors, agents or representatives, or employees of any of them including any such claims, costs, liabilities, demands, causes of action and judgments occasioned by or attributable to the negligent acts or omissions of the Consultant or its subcontractors, agents or representatives, or employees of any of them. 8.2 Company shall protect, indemnify, defend and save harmless Consultant, its affiliated companies, or Consultant's agents and employees of any of them, from and against all claims, costs (including reasonable attorneys' fees), liabilities, demands, causes of action and judgments, in favor of or asserted by Company, its subcontractors (other than Consultant and its subcontractors), agents or representatives, or employees of any of them, on account of personal injury or death or on account of damage to property of Company, its subcontractors, agents or representatives, or employees of any of them including any such claims, costs, liabilities, demands, causes of action and judgments occasioned by or attributable to the negligent acts or omissions of Company or its subcontractors, agents or representatives, or employees of any of them. 8.3 Company agrees to indemnify Consultant from and against any and all third party claims asserted against Consultant arising out of the Consulting Services provided hereunder, including reasonable attorney's fees: provided, however, in no event shall Company be required to indemnify Consultant for any claim arising from (i) infringement or alleged infringement by Consultant of a third party's proprietary rights or intellectual property in connection with any product or service supplied to Company; or (ii) gross negligence or willful misconduct on the part of Consultant. 9. CONFIDENTIAL INFORMATION 9.1 The Consultant, during the term hereof and for a two (2) year period from and after the termination of this Agreement, covenants that neither it nor any of its employees will divulge, communicate, use to the detriment of Company, or for the benefit of any other business, firm, person, partnership or corporation or otherwise misuse any confidential information, inventions, techniques, documentation, drawings, financial data, devices, results of research or other data with respect to Company or its business. The Consultant acknowledges that any such information, data or secrets it or its employees may have acquired as a result of their association with Company is of value and Company has the sole and exclusive proprietary interest therein; provided, however, that the foregoing shall not apply to any information, knowledge or data which is or becomes generally available to the public other than directly or indirectly as a result of disclosure by the Consultant or its employee. Consulting and Services Agreement Page -4- 10. PROPRIETARY INFORMATION AND DOCUMENTS 10.1 Consultant agrees that all documentation and information, including but not limited to programs, specifications, technical information and data, and all software and other tangible or intangible products, methods, techniques, materials or works prepared for Company or developed as a result of the Consulting Services performed hereunder (collectively the "Works") shall, to the extent permitted by law, be considered a work made for hire. Consultant hereby assigns to Company any rights it may have in such Works. Consultant further agrees that upon Company's request it shall execute and deliver to Company such documents as Company may reasonably request to vest title to such Works in Company. 10.2 Notwithstanding anything to the contrary contained herein, Consultant shall retain its rights to all of its own property owned or developed by Consultant prior to the term of this Agreement. To the extent that any such property is incorporated into work produced and/or delivered hereunder, Consultant grants Company a non-exclusive, perpetual license to use, copy and modify and such property as integrated into any such work for Company's own purposes. Additionally, Consultant retains the right, without limitation, to use its knowledge, experience, know-how, documentation and information including processes, ideas, concepts, and techniques, whether previously developed or developed in the course of performing this Agreement. Such right to use developed documentation and information specifically excludes the right to use any Confidential Information of Company or any Works. 10.3 Upon termination or expiration of this Agreement, the Consultant shall immediately deliver to and leave with Company all documents, records, manuals, files, films, photographs, letters, notes, notepads, reports, and other similar documentation or information containing any information concerning the business operations or affairs of Company as well as any other materials relating to Company's business and all copies thereof, whether prepared by the Consultant or others, and which are in the Consultant's possession or under its control. 11. ASSIGNMENT 11.1 No party shall be at liberty to assign this Agreement or the rights and obligations hereunder without the prior written consent of the other parties. 12. FURTHER ASSURANCES 12.1 Each of the parties agrees to execute and deliver all such other and additional instruments and documents and to do all such other acts and things as may be necessary to give full effect to this Agreement. 13. NOTICES 13.1 A notice or request required or permitted hereunder shall be sufficiently given if personally delivered or sent by facsimile transmission to: Consulting and Services Agreement Page -5- (a) Company at: 10300 Town Park Drive Houston, Texas 77072 Fax No.: (832) 351-8701 Attention: Chairman & CEO (b) Consultant at: Arch Creek Advisors LLC 247 Tamberlaine Houston, Texas 77024 Attention: Anthony Tripodo 14. ENTIRE AGREEMENT 14.1 This Agreement and the additional agreements referred to herein constitute the entire agreement of the parties with respect to the subject matter hereof and shall not be changed, modified or discharged except by an instrument in writing of equal formality herewith. 15. DISPUTE RESOLUTION 15.1 Any dispute or controversy between the Parties arising from or relating to this Agreement or the construction, validity, interpretation, meaning, enforcement, performance, non-performance, operation or breach of this Agreement shall be submitted to mediation. 15.2 If such mediation is unsuccessful, either of the parties may refer such dispute or disagreement to mandatory, final and binding arbitration by giving written notice thereof to the other and within twenty (20) days after the receipt of such written notice by the other. The arbitration shall be conducted by one (1) arbiter according to the rules currently in effect for the American Arbitration Association. 16. INTERPRETATIONS 16.1 The following rules shall be applied in interpreting this Agreement: (a) Unless otherwise stated, a reference herein to a numbered or lettered Section refers to the Section bearing that number or letter in this Agreement. (b) The proper law of this Agreement is the law of the State of Texas and the parties hereby consent to the jurisdiction of the State of Texas. (c) If any provision of this Agreement is wholly or partially invalid, this Agreement shall be interpreted as if the invalid provision had not been a part hereof. Consulting and Services Agreement Page -6- IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first written above. ARCH CREEK ADVISORS LLC By: /s/ Anthony Tripodo ------------------------------------ Anthony Tripodo Managing Director VERITAS DGC INC. By: /s/ David B. Robson ------------------------------------ David B. Robson Chairman & Chief Executive Officer Consulting and Services Agreement Page -7- EX-99.1 5 h06771exv99w1.txt CERT.OF DAVID B. ROBSON PURSUANT TO SECTION 906 EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Veritas DGC Inc. (the "Company") for the quarter ended October 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, David B. Robson, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. June 13, 2003 /s/ David B. Robson ------------------- David B. Robson Chief Executive Officer EX-99.2 6 h06771exv99w2.txt CERT.OF MATTHEW D. FITZGERALD PURSUANT TO SEC.906 EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Veritas DGC Inc. (the "Company") for the quarter ended October 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Matthew D. Fitzgerald, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. June 13, 2003 /s/ Matthew D. Fitzgerald ------------------------- Matthew D. Fitzgerald Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----