-----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, ToqvlpaL3JreZeY5Z9tNAuHf2eW5OoG1WU12tx7J8vhhjXI7ciiRlCKbupWKPSdS G5Miz17R31GYOPAwO5eRZw== 0000950129-99-004536.txt : 19991018 0000950129-99-004536.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950129-99-004536 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991015 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-K SEC ACT: SEC FILE NUMBER: 001-07427 FILM NUMBER: 99729541 BUSINESS ADDRESS: STREET 1: 3701 KIRBY DR STREET 2: STE 112 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7135128300 MAIL ADDRESS: STREET 1: 3701 KIRBY DRIVE SUITE 112 CITY: HOUSTON STATE: TX ZIP: 77098 FORMER COMPANY: FORMER CONFORMED NAME: DIGICON INC DATE OF NAME CHANGE: 19920703 10-K 1 VERITAS DGC INC. - DATED JULY 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-7427 VERITAS DGC INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0343152 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3701 KIRBY DRIVE, SUITE #112 HOUSTON, TEXAS 77098 (Address of principal executive offices) (Zip Code)
(713) 512-8300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par Value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant was $415,298,750 as of September 30, 1999. The number of shares of the Company's common stock, $.01 par value, (the "Common Stock"), outstanding at September 30, 1999 was 22,993,788 (including 1,505,595 Veritas Energy Services Inc. exchangeable shares which are identical to the Common Stock in all material respects). The registrant's proxy statement to be filed in connection with the registrant's 1999 Annual Meeting of Stockholders is incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS FORM 10-K
ITEM PAGE NUMBER - ---- ----------- PART I 1 Business General..................................................... 1 Industry Conditions......................................... 2 Services and Markets........................................ 2 Principal Operating Assets.................................. 3 Technology and Capital Expenditures......................... 5 Competition and Other Business Conditions................... 6 Backlog..................................................... 6 Significant Customers....................................... 6 Employees................................................... 7 2 Properties.................................................. 7 3 Legal Proceedings........................................... 7 4 Submission of Matters to a Vote of Security Holders......... 7 PART II 5 Market for Registrant's Common Equity and Related Stockholder Matters....................................... 7 6 Selected Consolidated Financial Data........................ 8 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 7A. Quantitative and Qualitative Disclosures Regarding Market Risk...................................................... 12 8 Consolidated Financial Statements and Supplementary Data.... 13 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 36 PART III 10 Directors and Executive Officers of the Registrant.......... 36 11 Executive Compensation...................................... 36 12 Security Ownership of Certain Beneficial Owners and Management................................................ 36 13 Certain Relationships and Related Transactions.............. 36 PART IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 36 Signatures.................................................. 39
3 This report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Veritas DGC's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including those set forth under Item 1. "Business" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." PART I ITEM 1. BUSINESS GENERAL Veritas DGC is one of the world's leading providers of integrated geophysical technologies to the petroleum industry worldwide. Oil and gas companies utilize geophysical technologies to: - identify new areas where subsurface conditions are favorable for the production of hydrocarbons; - determine the size and structure of previously identified oil and gas fields; and - optimize development and production of hydrocarbon reserves (reservoir management). Veritas DGC acquires, processes and interprets geophysical data and produces geophysical surveys which are either 3D images or 2D images of the subsurface geology in the survey area. Veritas DGC also produces 4D surveys, which record fluid movement in the reservoir, by repeating specific 3D surveys over time. Veritas DGC's data acquisition operations are carried out as follows: - Offshore -- by crews operating from nine geophysical research vessels, including two advanced Veritas Viking flagships. Of the nine vessels, six are chartered and three are owned by Veritas DGC. - On land and in transition (swamp and tidal) areas -- by crews utilizing technologically advanced geophysical recording equipment having 35,000 channels of recording capacity and capable of being configured to equip as many as 27 crews for 3D operations. Veritas DGC conducts surveys on both an exclusive contract basis and a multi-client basis. When operating on an exclusive contract basis, Veritas DGC's customer purchases all rights to the completed geophysical survey, including all related data and interpretive manipulations of the data. When operating on a multi-client basis, Veritas DGC retains ownership of the survey and all associated data and seeks to license the survey to multiple customers. In line with current industry trends, Veritas DGC anticipates that multi-client surveys will constitute a growing percentage of its revenues. Historically, Veritas DGC has generally realized higher operating margins from multi-client surveys than from surveys performed on an exclusive contract basis. For the fiscal year ended July 31, 1999, geophysical services performed on a contract basis accounted for approximately 59% of Veritas DGC's revenues, and the licensing of multi-client geophysical surveys accounted for the remaining 41% of revenues. Veritas DGC's geophysical data processing operations are conducted at 22 data processing centers in 13 countries worldwide. Three of these centers operate the latest NEC large vector supercomputers configured primarily for processing large-scale offshore surveys and performing complex 3D imaging and prestack depth migration ("PSDM"). PSDM produces a more accurate image of subsurface geology, particularly beneath obstructions such as complex salt formations in the Gulf of Mexico and subsurface basalt flows in the North Atlantic. The other 19 centers operate advanced data processing hardware from Hewlett-Packard, Sun Microsystems and IBM. All of the centers operate proprietary Veritas DGC software. Veritas DGC aggressively pursues innovative new technologies through research and development efforts both internally and externally. For example, with the launch of the new data visualization center and the formation of a new data interpretation division, Veritas DGC offers advanced data visualization, interpretation and reservoir characterization services. Huge volumes of geophysical data can be rapidly viewed at the 1 4 visualization center in a collaborative environment, enabling drilling locations to be identified in significantly less time than was previously possible. INDUSTRY CONDITIONS Overall demand for geophysical services is dependent upon the level of expenditures by oil and gas companies for exploration, production, development and field management activities, which depends in part on present and expected future oil and gas prices. Most of fiscal 1999 was characterized by depressed oil prices, which resulted in lower levels of cash flow for oil and gas companies and lower spending on exploration and production, including geophysical services. Recent oil prices are significantly higher than oil prices experienced throughout most of fiscal 1999. While management believes that these higher oil prices may result in higher levels of spending for geophysical services, there can be no assurance that expenditures will increase. Over the past five years, worldwide demand for advanced geophysical technologies increased rapidly. The greater precision and improved subsurface resolution obtainable from 3D geophysical data, combined with advanced processing techniques, have assisted oil and gas companies in finding new fields and more accurately delineating existing fields. These improved technologies have been a key factor in improving drilling success ratios and lowering finding and field extension costs. Furthermore, improved 4D technology is also enhancing production monitoring methodologies and the management of existing oil and gas reservoirs. The recent advances in geophysical technologies, coupled with improvements in drilling and completion techniques, are significantly enhancing oil and gas companies' ability to develop, explore for and manage oil and gas reserves cost-effectively. SERVICES AND MARKETS Veritas DGC conducts surveys both on an exclusive basis ("contract") for customers and on its own behalf for licensing to multiple customers ("multi-client"). The multi-client portion of Veritas DGC's business has been steadily increasing over the past three years generating 41% of revenues in fiscal 1999, up from 39% in fiscal 1998 and 31% in fiscal 1997. The high cost of acquiring and processing geophysical data on an exclusive basis, particularly in deep water environments, has prompted many oil and gas companies to participate in multi-client surveys. In response, Veritas DGC has added significantly to its multi-client data library over the last three years, increasing its size and geographic breadth, as well as enhancing the quality of the data through advanced processing. Currently the library is comprised of 2.4 million line kilometers of 2D and 3D surveys in many of the world's major oil basins. The marine library covers areas in the Gulf of Mexico, the North Sea and the offshore margins of Southeast Asia, West Africa, North Africa, Canada and Brazil. The land library includes surveys in Texas, Mississippi, Wyoming and Alberta, Canada. Veritas DGC is also enhancing certain of its data library surveys with advanced processing techniques, such as PSDM. 2 5 The following tables set forth Veritas DGC's revenues by contract type and geographical area:
YEARS ENDED JULY 31, ------------------------------ REVENUES BY CONTRACT TYPE 1999 1998 1997 - ------------------------- -------- -------- -------- (IN THOUSANDS) Contract work........................................ $227,699 $324,873 $250,183 Licensing of multi-client data....................... 161,206 204,086 112,532 -------- -------- -------- $388,905 $528,959 $362,715 ======== ======== ========
YEARS ENDED JULY 31, ------------------------------ REVENUES BY GEOGRAPHICAL AREA 1999 1998 1997 - ----------------------------- -------- -------- -------- (IN THOUSANDS) United States........................................ $203,667 $280,765 $179,898 Canada............................................... 32,325 47,059 52,141 Latin America........................................ 61,187 93,494 51,276 Europe............................................... 35,850 51,089 42,798 Middle East/Africa................................... 20,785 14,090 6,370 Asia Pacific......................................... 35,091 42,462 30,232 -------- -------- -------- Total...................................... $388,905 $528,959 $362,715 ======== ======== ========
In fiscal 1999, 1998 and 1997, 48%, 47% and 50%, respectively, of Veritas DGC's revenues were attributable to non-U.S. operations and export sales. (See Note 12 of Notes to Consolidated Financial Statements for additional geographical information.) PRINCIPAL OPERATING ASSETS Veritas DGC acquires, processes and interprets geophysical information utilizing a wide array of assets as follows. Land and Transition Zone Acquisition Veritas DGC's land and transition zone acquisition services are performed with technologically advanced geophysical equipment. The equipment, as of July 31, 1999, had a combined recording capacity of approximately 30,000 channels which can be configured to equip up to 22 crews for 3D operations. The acquisition of Enertec Resource Services Inc. on September 30, 1999 added an additional 5,000 channels, sufficient to equip up to another five crews. Each crew consists of: a surveying unit which lays out the lines to be recorded and marks the site for shot-hole placement or equipment location; an explosive or mechanical vibrating unit that produces the acoustical impulse; and a recording unit that synchronizes the shooting and captures the signal via geophones. On a typical land geophysical survey, the geophysical crew is supported by several drill crews, which are typically furnished by third parties under short-term contracts. Drill crews operate in advance of the geophysical crew and bore shallow holes for explosive charges which, when detonated by the geophysical crew, produce the necessary acoustical impulse. During fiscal 1999, Veritas DGC achieved significant progress in the development of the Veritas Millennium II project, a plan to track and manage all aspects of geophysical field operations from one remote location. The first phase of the project involves the use of low earth-orbiting satellites to transmit data directly from a surveyor's backpack in the field to a central control center where the data is monitored and analyzed by experts. This allows for real-time quality control and, via two-way satellite communication, permits immediate intervention where required. The next phase in Millennium II is to make project information available to clients in real-time via the internet. 3 6 Marine Acquisition Marine acquisition services are carried out by Veritas DGC's crews operating from both owned and chartered vessels which have been modified or equipped to Veritas DGC's specifications. During the last several years, a majority of the marine geophysical data acquisition services performed by Veritas DGC involved 3D surveys. The following table sets forth certain information concerning the geophysical vessels operated by Veritas DGC as of July 31, 1999.
YEAR ENTERED VESSEL(1) SERVICE LOCATION LENGTH BEAM CHARTER EXPIRATION - --------- ------- --------------- -------- ------- ------------------ Acadian Searcher............... 1983 Australia 217 feet 44 feet Owned Ross Seal(2)................... 1987 Southeast Asia 176 feet 38 feet December 1999 Polar Search................... 1992 Brazil 300 feet 51 feet January 2002 Polar Princess................. 1996 Gulf of Mexico 250 feet 46 feet June 2000 Professor Kurentsov(2)......... 1997 Egypt 225 feet 41 feet October 1999 Veritas Viking................. 1998 Canada 305 feet 72 feet June 2006 Veritas Viking II.............. 1999 North Sea -- UK 305 feet 72 feet June 2007
- --------------- (1) Does not include vessels acquired from Enertec Resource Services Inc. which are discussed below. (2) The Professor Kurentsov was replaced by a newer vessel, the New Venture, in the first quarter of fiscal 2000. The New Venture is operating off of West Africa under a two year charter expiring in September 2001. The Ross Seal is currently being decommissioned and is expected to be replaced by a newer vessel in the second quarter of fiscal 2000. Each vessel generally has an equipment complement consisting of geophysical recording instrumentation, digital streamer cable, cable location and data location systems, multiple navigation systems, a source control system which controls the synchronization of the energy source and a firing system which generates the acoustical impulses. The streamer cable contains hydrophones that receive the acoustical impulses reflected by variations in the subsurface strata. Data acquired by each channel in the digital cable is transmitted to recording instruments for storage on magnetic media where some processing sequences may be applied, thus reducing subsequent processing time and the effective acquisition costs to the customer. At present, four of Veritas DGC's vessels are equipped with multiple streamers and multiple energy sources, which acquire more lines of data with each pass, reducing completion time and acquisition cost. The Veritas Viking and Viking II are both capable of deploying more than 12 streamer cables. As a result of the Enertec acquisition on September 30, 1999, Veritas DGC owns two vessels which acquire high-resolution surveys in the Gulf of Mexico, mapping seafloor and shallow sub-seafloor hazards that represent a threat to drilling and construction operations. These surveys are required by the U.S. government prior to the issuance of permits for drilling and construction. Data Processing and Interpretation As of July 31, 1999, Veritas DGC operated 21 data processing centers capable of processing 2D, 3D and 4D data. A majority of Veritas DGC's data processing services are performed on 3D seismic data. The centers process data received from the field, both from Veritas DGC and other geophysical crews, to produce an image of the earth's subsurface using proprietary computer software and techniques developed by Veritas DGC. Veritas DGC also reprocesses older geophysical data using new techniques designed to enhance the 4 7 quality of the data. Veritas DGC's data processing centers have opened at various times from 1966 through 1999 and are located in: NORTH AMERICA SOUTH AMERICA EUROPE/MIDDLE EAST ASIA PACIFIC - ----------------------- ----------------------- ------------------ ---------------------- Houston, Texas Buenos Aires, Argentina Crawley, England Singapore Dallas, Texas Neuquen, Argentina Stavanger, Norway Brisbane, Australia Austin, Texas Santa Cruz, Bolivia Aberdeen, Scotland Perth, Australia Midland, Texas Caracas, Venezuela Abu Dhabi, U.A.E. Jakarta, Indonesia Denver, Colorado Quito, Ecuador Kuala Lumpur, Malaysia Oklahoma City, Oklahoma Calgary, Alberta, Canada
As a result of the Enertec acquisition, Veritas DGC acquired an additional data processing center in New Orleans, Louisiana. Veritas DGC's centers operate high capacity, advanced technology data processing systems based on NEC, Sun Microsystems, IBM and Hewlett-Packard computer systems with high-speed networks. These systems utilize Veritas DGC's proprietary data processing software. The marine and land data acquisition crews have certain software identical to that utilized in the processing centers, allowing for ease in the movement of data from the field to the data processing centers. Veritas DGC operates both land and marine data processing centers and tailors the equipment and software deployed in an area to meet the local market demands. To enhance its speed and capacity in processing large-scale offshore surveys and performing complex 3D PSDM, Veritas DGC installed an NEC SX-4 large vector supercomputer in its Houston processing center in early fiscal 1997. The success of this first system led to the installation of a second in the Crawley center in August 1997 and a third in Singapore in July 1998. These supercomputer installations act as global resources for all of Veritas DGC's data processing operations. During fiscal 1999, Veritas DGC opened a state of the art visualization center in Houston, Texas. This center allows teams of explorationists to view and interpret large volumes of complex 3D data. The visualization center is an elaborate imaging tool used for advanced interpretive techniques which enhances the understanding of regional geology and reservoir modeling. The visualization center allows Veritas DGC to offer the type of collaborative geophysical model building which is now enabling oil companies to explore areas of complex geology such as the large sub-salt plays in the deepwater Gulf of Mexico. An additional visualization center will be added in Crawley, England in fiscal 2000. TECHNOLOGY AND CAPITAL EXPENDITURES The geophysical industry is highly technical, and the requirements for the acquisition and processing of geophysical data have evolved continuously during the past 50 years. Accordingly, it is significant to Veritas DGC that its technological capabilities are comparable or superior to those of its competitors. Veritas DGC maintains its technological capabilities through continuing research and development, strategic alliances with equipment manufacturers and by licensing technology from others. Veritas DGC has introduced several technological innovations that have become industry standard practice in both acquisition and processing of geophysical data. Currently, Veritas DGC employs approximately 50 people in its research and development activities, substantially all of whom are scientists, engineers or programmers. During fiscal 1999, 1998 and 1997, research and development expenditures were $7.7 million, $6.2 million and $3.7 million, respectively. The research and development budget for fiscal 2000 is $8.3 million. Veritas DGC rarely applies for patents on internally developed technology. This policy is based upon the belief that most proprietary technology, even where regarded as patentable, can be more effectively protected by maintaining confidentiality than through disclosure and a patent enforcement program. Certain of the equipment, processes and techniques used by Veritas DGC are subject to the patent rights of others, and 5 8 Veritas DGC holds non-exclusive licenses with respect to a number of such patents. While the Company regards as beneficial its access to others' technology through licensing, Veritas DGC believes that substantially all presently licensed technology could be replaced without significant disruption to the business should the need arise. During fiscal 1999, 1998 and 1997, capital expenditures were $52.4 million, $99.5 million and $96.1 million, respectively. The capital expenditure budget for fiscal 2000 is approximately $84.0 million. The actual level of future capital expenditures will depend on the availability of funding and market requirements as dictated by oil and gas company activity levels. Much of this capital is earmarked for the acquisition of additional leading edge equipment such as solid streamers, visualization center and other data processing hardware, and satellite-linked monitoring and quality control systems. This equipment will enable Veritas DGC to acquire, process, and interpret data more efficiently and effectively, ultimately allowing operators quicker access to their reserves. COMPETITION AND OTHER BUSINESS CONDITIONS The acquisition and processing of seismic data for the oil and gas exploration industry has historically been highly competitive worldwide. As a result of changing technology and increased capital requirements, the geophysical industry has consolidated substantially since the late 1980's. The largest competitors remaining in the market are Western Geophysical (a division of Baker Hughes), Schlumberger, Compagnie Generale Geophysique and Petroleum Geo-Services. Success in marketing geophysical surveys is based on several competitive factors, including price, crew experience, equipment availability, technological expertise, reputation for quality and dependability and, in the case of multi-client surveys, customer interest for the area surveyed. Veritas DGC's data acquisition activities often are conducted under extreme weather and other hazardous conditions. Accordingly, these operations are subject to risks of injury to personnel and loss of equipment. Veritas DGC carries insurance against the destruction of, or damage to, its owned and chartered vessels, geophysical equipment and property and injury to persons that may result from its operations and considers the amounts of such insurance to be adequate. Veritas DGC may not be able to obtain insurance against certain risks or for equipment located from time to time in certain areas of the world. Veritas DGC obtains insurance against war, expropriation, confiscation and nationalization when such insurance is available and when management considers it advisable to do so. Such coverage is not always available and, when available, is subject to unilateral cancellation by the insuring companies on short notice. Veritas DGC also carries insurance against pollution hazards. Fixed costs, including costs associated with vessel charters and operating leases, depreciation and interest expense, account for a substantial percentage of Veritas DGC's costs and expenses. As a result, downtime or low productivity resulting from reduced demand, equipment failures, and weather interruptions or otherwise, can result in significant operating losses. BACKLOG At July 31, 1999, Veritas DGC's backlog of commitments for services was $114.0 million, compared with $300.0 million at July 31, 1998. It is anticipated that a majority of the July 31, 1999 backlog will be completed in the next 12 months. This backlog consists of written orders or commitments believed to be firm. Contracts for services are occasionally varied or modified by mutual consent and in certain instances are cancelable by the customer on short notice without penalty. As a result of these factors, Veritas DGC's backlog as of any particular date may not be indicative of Veritas DGC's actual operating results for any succeeding fiscal period. SIGNIFICANT CUSTOMERS Historically, Veritas DGC's principal customers have been international oil and gas companies, foreign national oil companies and independent oil and gas companies. In fiscal 1999, Royal Dutch/Shell and its subsidiaries accounted for about 12% of Veritas DGC's revenues. No other customer accounted for 10% or 6 9 more of total revenues in fiscal 1999. No single customer accounted for 10% or more of total revenues during fiscal 1998 and 1997. EMPLOYEES At July 31, 1999, Veritas DGC had approximately 2,800 full-time employees. With the exception of 40 employees working at the Singapore data processing center, none of its employees is subject to collective bargaining agreements. Veritas DGC considers the relations with its employees to be good. ITEM 2. PROPERTIES Veritas DGC's headquarters in Houston leases approximately 112,000 square feet of office space, housing data processing operations, executive, accounting, research and development and geophysical operating personnel. Veritas DGC leases additional space aggregating approximately 429,000 square feet which is used primarily for geophysical data processing operations, exploration and development information services, geophysical operating personnel and warehousing in its 21 data processing centers located around the world. These leases expire at various times during 2000 through 2013. Veritas DGC owns property in Jackson, Mississippi, comprising 37,551 square feet of office and workshop facilities and in Calgary, Alberta, Canada comprising 15,000 square feet of office space and maintenance facilities. Additionally, Veritas DGC owns approximately two acres in Calgary, Alberta, Canada used for equipment storage. In 1999, Veritas DGC purchased 18.5 acres of land in Houston, Texas as the location for a new headquarters office. This land was sold to a developer in September 1999 in a sale-leaseback transaction associated with the construction and 15 year lease of a 220,000 square foot office complex. Veritas DGC plans to move its Houston employees into the complex in late 2000. ITEM 3. LEGAL PROCEEDINGS As of September 30, 1999, Veritas DGC was not a party to, nor was its property the subject of any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the reported high and low sales prices for the common stock on the New York Stock Exchange for the indicated fiscal periods.
PERIOD HIGH LOW ------ ---- --- 1999 1st Quarter............................................ $34 9/16 $10 5/8 2nd Quarter............................................ 23 15/16 11 13/16 3rd Quarter............................................ 20 1/4 8 3/4 4th Quarter............................................ 23 3/4 16 1998 1st Quarter............................................ $50 1/8 $25 2nd Quarter............................................ 47 5/16 26 1/2 3rd Quarter............................................ 54 1/2 36 4th Quarter............................................ 60 7/8 30 7/16
7 10 On September 30, 1999, the last reported sale price of Veritas DGC's common stock on the New York Stock Exchange was $19 1/4 per share. On September 30, 1999, the approximate number of holders of record of common stock was 352. Historically, Veritas DGC has not paid any dividends on its common stock and has no present plans to pay any dividends. The payment of any future dividends on common stock would depend, among other things, upon the current and retained earnings and financial condition of Veritas DGC and upon a determination by its board of directors that the payment of dividends would be desirable. In addition, Veritas DGC's revolving credit facility prohibits the payment of cash dividends. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED JULY 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues.............................. $388,905 $528,959 $362,715 $250,596 $215,630 Net income............................ 20,294 66,958 25,125 1,281 5,594 Net income per common share -- basic..................... .89 2.96 1.33 .07 .31 Net income per common share -- diluted................... .88 2.87 1.30 .07 .31
AS OF JULY 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS OF DOLLARS) BALANCE SHEET DATA: Total assets.......................... $541,404 $478,490 $385,089 $198,592 $184,340 Long-term debt (including current maturities)........................ 135,251 75,561 75,971 41,090 36,788
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Most of fiscal 1999 was characterized by depressed commodity prices and a number of oil and gas company mergers, resulting in reduced exploration and geophysical spending. Management has undertaken certain initiatives in response to the current industry downturn to preserve our financial strength and flexibility. Since September 1998, headcount has decreased from approximately 4,500 to 2,800 employees. In addition, Veritas DGC completed the decommissioning of its multi-boat operation in the Gulf of Mexico in March 1999. All three decommissioned vessels were on short-term charters and have been returned to the vessel owners. Veritas DGC conducts surveys on both an exclusive contract basis and a multi-client basis. When operating on an exclusive contract basis, Veritas DGC's customer purchases all rights to the completed geophysical survey, including all related data and interpretive manipulations of the data. When operating on a multi-client basis, Veritas DGC retains ownership of the survey and all associated data and seeks to license the survey to multiple customers. In line with current industry trends, Veritas DGC anticipates that multi-client surveys will constitute a growing percentage of its revenues. Historically, Veritas DGC has generally realized higher operating margins from multi-client surveys than from surveys performed on an exclusive contract basis. For the year ended July 31, 1999, geophysical services performed on a contract basis accounted for approximately 59% of Veritas DGC's revenues, and the licensing of multi-client geophysical surveys accounted for the remaining 41% of revenues. RESULTS OF OPERATIONS Fiscal 1999 compared with Fiscal 1998 Revenues. Revenues decreased by 26%, to $388.9 million from $529.0 million in fiscal 1998, due to the general downturn in exploration spending driven by depressed commodity prices. Multi-client revenues 8 11 decreased 21% from the prior year, from $204.1 million to $161.2 million, while contract revenues decreased 30%, from $324.9 million to $227.7 million. Due to Veritas DGC's increased activity in the onshore multi-client business, that revenue stream increased to $33.0 million from $10.9 million in the previous year, somewhat offsetting the offshore multi-client revenue decline. Operating Expenses. Costs of services decreased 23%, from $346.9 million to $266.0 million, but as a percent of revenues increased from 66% to 68%. The increase in expense as a percent of revenues was mainly due to significant price declines in the contract business and due to fixed cost elements in operating expenses. Depreciation and Amortization. Depreciation and amortization expense increased 22%, from $56.1 million to $68.4 million, primarily due to $151.9 million of capital expenditures over the past two years. Selling, General and Administrative. Selling, general and administrative expenses decreased 11%, from $18.8 million to $16.7 million, resulting primarily from the reduction of discretionary spending at corporate headquarters. Interest Expense. Interest expense increased from $7.3 million to $12.6 million due to the issuance in October 1998 of an additional $60.0 million of the 9 3/4% senior notes. Other (Income) Expense. Other (income) expense increased from income of $338,000 in fiscal 1998 to income of $5.1 million in fiscal 1999 primarily due to net foreign currency losses of $2.3 million in fiscal 1998 as compared with net foreign currency gains of $1.8 million in fiscal 1999. Interest income was approximately $4.2 million in each of those years. Income Taxes. Provision for income taxes decreased from $34.2 million to $9.6 million as a result of the Company's decreased profitability. Equity in (Earnings) Loss. Equity in (earnings) loss is related to the Indonesian joint venture, which posted a loss of $303,000 for fiscal 1999 compared to a net profit of $972,000 in fiscal 1998. Decreases in contract revenues and a relatively fixed cost base accounted for the decreased profitability for the fiscal year. Fiscal 1998 compared with Fiscal 1997 Revenues. Revenues increased by 46%, from $362.7 million in fiscal 1997 to $529.0 million in fiscal 1998. Multi-client revenues increased 81%, from $112.5 million to $204.1 million, primarily due to the large surveys in the deepwater Gulf of Mexico where industry interest in fiscal 1998 was high. Most of the U.S. marine and processing resources were dedicated to multi-client work in fiscal 1998. The onshore multi-client business increased from $2.5 million in fiscal 1997 to $10.9 million in fiscal 1998. Contract revenues increased 30%, from $250.2 million to $324.9 million, with the largest growth stemming from additional acquisition and processing capacity as well as increased operational efficiency. The market for processing intensive pre-stack time and depth migration was up significantly from fiscal 1997 as customers worked to analyze and interpret the massive 3D surveys shot in geologically complex areas. Operating Expenses. Costs of services increased 28%, from $271.7 million to $346.9 million, but as a percent of revenues decreased from 75% to 66%. The improvement in operating margins is mainly attributable to significant sales and performance of multi-client data surveys that generally have higher margins. Data processing operating margins also showed improvement due to more efficient equipment. Land and transition zone margins remained consistent. Depreciation and Amortization. Depreciation and amortization expense increased 38%, from $40.6 million to $56.1 million, due to the large increase in capital expenditures over the past two years. Selling, General and Administrative. Selling, general and administrative expenses increased 65%, from $11.4 million to $18.8 million, resulting primarily from the addition of staff to support our expanded operations and costs incurred in implementing new administrative and accounting systems and a more aggressive marketing strategy. 9 12 Interest Expense. Interest expense includes an $800,000 reduction in fiscal 1998 for interest capitalized on the build out of a newly chartered vessel. Other (Income) Expense. Other (income) expense increased from a loss of $630,000 to income of $338,000 primarily from interest income earned on higher average cash balances. This increase was offset by net foreign currency losses resulting from fluctuations in foreign money markets. Income Taxes. Provision for income taxes increased from $6.1 million to $34.2 million as a result of Veritas DGC's increased profitability. The effective tax rate increased from 20% to 34% due to the write-off of certain of Veritas DGC's investments in the prior year. LIQUIDITY AND CAPITAL RESOURCES Sources and Uses Veritas DGC's internal sources of liquidity are cash, cash equivalents and cash flow from operations. External sources include public and private financing, the unutilized portion of a revolving credit facility, equipment financing and trade credit. Management believes that these sources of funds are adequate to meet the liquidity needs of Veritas DGC for fiscal 2000. As of July 31, 1999, Veritas DGC had approximately $135.0 million in senior notes outstanding due in October 2003. Veritas DGC also has a revolving credit facility due July 2001 from commercial lenders that provides advances up to $50.0 million. Advances, however, are limited by a borrowing base ($32.1 million at July 31, 1999) and bear interest, at Veritas DGC's election, at LIBOR or prime rate plus a margin based on certain financial ratios maintained by Veritas DGC. Advances are secured by certain accounts receivable. As of July 31, 1999, there were no outstanding advances under the credit facility, but $5.8 million of the credit facility was utilized for letters of credit and an additional $26.3 million is available for borrowings. Veritas DGC requires significant amounts of working capital to support its operations and fund capital spending and research and development programs. Veritas DGC's capital expenditure budget for fiscal 2000 is approximately $84.0 million, which includes expenditures of approximately $25.0 million to maintain or replace current operating equipment. Research and development expenditures for fiscal 2000 are budgeted at $8.3 million. Veritas DGC has also increased its multi-client activity and significantly expanded its multi-client data library. Because of the elapsed time between survey execution, sale and ultimate cash receipt, multi-client work generally requires greater amounts of working capital than contract work. Depending upon the timing of the sales of the multi-client surveys and the contract terms relating to the collection of the proceeds from such sales, Veritas DGC's liquidity may be affected. Veritas DGC seeks pre-funding commitments from customers for a portion of the cost of these surveys. However, because of market conditions, purchase commitment levels are currently much lower than in past years. Veritas DGC believes that these multi-client surveys have good long-term sales, earnings and cash flow potential, but there is no assurance that Veritas DGC will recover the costs of these surveys. In addition to the capital expenditure budget, the planned net investment in the multi-client data library (the change in the balance sheet account) for fiscal 2000 is $81.0 million. Veritas DGC will require substantial cash flow to continue operations on a satisfactory basis, complete its capital expenditure and research and development programs and meet its principal and interest obligations with respect to outstanding indebtedness. While management believes that Veritas DGC has adequate sources of funds to meet its liquidity needs, its ability to meet its obligations depends on its future performance, which, in turn, is subject to general economic conditions, business and other factors beyond Veritas DGC's control. Key factors affecting future results will include utilization levels of acquisition and processing assets and the level of multi-client data library sales, all of which are driven by exploration spending and, ultimately, by underlying commodity prices. If Veritas DGC is unable to generate sufficient cash flow from operations or otherwise to comply with the terms of its revolving credit facility or indentures, it may be required to refinance all or a portion of its existing debt or obtain additional financing. Veritas DGC cannot make any assurances that it would be able to obtain such refinancing or financing, or any refinancing or financing would result in a level of net proceeds required. 10 13 To ensure that Veritas DGC has available as many financing options as possible, a shelf registration allowing the issuance of up to $200.0 million in additional debt and/or equity was filed with the SEC after the end of fiscal year 1999. (See Note 14 of Notes to Consolidated Financial Statements.) Year 2000 Year 2000 Issue. Some software applications, hardware, equipment and embedded chip systems identify dates using only the last two digits of the year. These products may be unable to distinguish between dates in the year 2000 and dates in the year 1900. That inability (referred to as the "Year 2000" issue), if not addressed, could cause applications, equipment or systems to fail or provide incorrect information after December 31, 1999, or when using dates after December 31, 1999. This in turn could have an adverse effect on Veritas DGC, because it directly depends on its own applications, equipment and systems and indirectly depends on those of other entities with which Veritas DGC interacts. Compliance Program. Veritas DGC has prepared a formal plan to address Year 2000 issues as they relate to Veritas DGC's business and its operations. In accordance with that plan, Veritas DGC has evaluated all internal hardware and software used in its operations, including those used to support Veritas DGC's activities, such as geophysical data acquisition and processing equipment and accounting and payroll systems. Veritas DGC's State of Readiness. In the ordinary course of business, Veritas DGC has replaced a significant amount of its hardware and software with Year 2000 compliant systems. Veritas DGC has also identified all external relationships, mainly suppliers and customers, and mailed each entity an internally prepared questionnaire regarding Year 2000 issues. Responses returned indicate a state of readiness, and non-responses do not pertain to critical systems. Currently, Veritas DGC estimates that it will complete required remedial actions by November 30, 1999. Contingency Planning. As part of the Year 2000 project, Veritas DGC has determined which of its business activities may be vulnerable to a Year 2000 disruption. An ongoing monitoring program and contingency procedures have been established in the event of unanticipated non-compliance problems. Costs to Address Year 2000 Compliance Issues. Cost of compliance to date approximates $125,000, and Veritas DGC is not aware of any material contingencies or costs that will be incurred in the future. Risk of Non-Compliance. While Veritas DGC believes that its Year 2000 compliance program has substantially reduced the risks associated with the Year 2000 issue, there can be no assurance that each and every remedial action will be successful. Due to the general uncertainty inherent in the Year 2000 issues, Veritas DGC cannot conclude that its failure or the failure of third parties to achieve Year 2000 compliance will not adversely affect its financial position, results of operations or cash flows. Other Since Veritas DGC's quasi-reorganization with respect to Digicon Inc. on July 31, 1991, the tax benefits of net operating loss carryforwards existing at the date of the quasi-reorganization have been recognized through a direct addition to paid-in capital, when realization is more likely than not. Additionally, the utilization of the net operating loss carryforwards existing at the date of the quasi-reorganization is subject to certain limitations. For the year ended July 31, 1999, Veritas DGC recognized $4.6 million related to these benefits, due to increased profitability of Veritas DGC's U.K. operations. (See Note 5 of Notes to Consolidated Financial Statements.) Veritas DGC receives some account receivable payments in foreign currency and is not currently conducting a hedging program because it does not consider its current exposure to foreign currency fluctuations to be significant. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge 11 14 accounting. Veritas DGC will be required to implement this statement in its first quarter of fiscal 2001. Veritas DGC believes that the implementation of this standard will not have a material adverse effect on Veritas DGC's consolidated financial position, results of operations or liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK At July 31, 1999, Veritas DGC had no significant market risk related to foreign currencies and had no derivative financial instruments. At July 31, 1999, Veritas DGC had $135.0 million of 9 3/4% fixed rate debt maturing in October 2003 with a fair value of $137.4 million, using its current borrowing rate of 9 1/4%. 12 15 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Veritas DGC Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Veritas DGC Inc. and its subsidiaries at July 31, 1999 and 1998 and the results of their operations and their cash flows for the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Houston, Texas October 8, 1999 13 16 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JULY 31, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................................................... $388,905 $528,959 $362,715 Costs and expenses: Cost of services......................................... 266,000 346,896 271,656 Depreciation and amortization............................ 68,435 56,121 40,631 Selling, general and administrative...................... 16,734 18,758 11,408 Other (income) expense: Interest.............................................. 12,623 7,318 7,484 Merger related costs.................................. 597 Other................................................. (5,050) (338) 630 -------- -------- -------- Total costs and expenses......................... 358,742 428,755 332,406 -------- -------- -------- Income before provision for income taxes and equity in (earnings) loss of 50% or less-owned companies and joint ventures........................................... 30,163 100,204 30,309 Provision for income taxes................................. 9,566 34,218 6,062 Equity in (earnings) loss of 50% or less-owned companies and joint ventures....................................... 303 (972) (878) -------- -------- -------- Net income................................................. $ 20,294 $ 66,958 $ 25,125 Other comprehensive income (net of tax -- $0 in 1999, 1998 and 1997) Foreign currency translation adjustments................. (692) (2,597) (129) Unrealized loss on investments -- available for sale..... (557) -------- -------- -------- Comprehensive income....................................... $ 19,045 $ 64,361 $ 24,996 ======== ======== ======== Per share: Net income per common share -- basic..................... $ .89 $ 2.96 $ 1.33 ======== ======== ======== Weighted average common shares -- basic.................. 22,733 22,594 18,898 ======== ======== ======== Net income per common share -- diluted................... $ .88 $ 2.87 $ 1.30 ======== ======== ======== Weighted average common shares -- diluted................ 23,001 23,315 19,364 ======== ======== ========
See Notes to Consolidated Financial Statements 14 17 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
JULY 31, --------------------- 1999 1998 -------- -------- (IN THOUSANDS EXCEPT PAR VALUE) Current assets: Cash and cash equivalents................................. $ 73,447 $ 40,089 Restricted cash investments............................... 300 186 Accounts and notes receivable (net of allowance for doubtful accounts: 1999, $3,038; 1998, $1,248).......... 113,761 151,820 Materials and supplies inventory.......................... 4,417 4,106 Prepayments and other..................................... 8,259 16,290 Investments -- available for sale......................... 3,671 -------- -------- Total current assets............................... 203,855 212,491 Property and equipment: Land...................................................... 6,837 Geophysical equipment..................................... 212,725 206,449 Data processing equipment................................. 76,320 72,925 Geophysical ship.......................................... 8,524 7,534 Leasehold improvements and other.......................... 52,991 39,116 -------- -------- Total.............................................. 357,397 326,024 Less accumulated depreciation........................... 201,026 151,104 -------- -------- Property and equipment -- net...................... 156,371 174,920 Multi-client data library................................... 138,753 51,143 Investment in and advances to joint ventures................ 2,640 2,943 Goodwill (net of accumulated amortization: 1999, $3,683; 1998, $3,233)............................................. 2,159 2,655 Deferred tax asset.......................................... 23,120 19,157 Long term notes receivable (net of allowance: $1,000)....... 3,696 Other assets................................................ 11,252 15,181 -------- -------- Total.............................................. $541,846 $478,490 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...................... $ 240 $ 289 Accounts payable -- trade................................. 26,243 42,493 Accrued interest.......................................... 4,010 2,234 Other accrued liabilities................................. 48,640 50,753 Income taxes payable...................................... 5,472 10,682 -------- -------- Total current liabilities.......................... 84,605 106,451 Non-current liabilities: Long-term debt -- less current maturities................. 135,011 75,272 Other non-current liabilities............................. 6,672 5,071 -------- -------- Total non-current liabilities...................... 141,683 80,343 Commitments and contingent liabilities (See Note 8) Stockholders' equity: Preferred stock, $.01 par value; authorized:1,000,000 shares; none issued Common stock, $.01 par value; authorized: 40,000,000 shares; issued: 21,470,938 and 21,302,865 shares (excluding 1,505,595 and 1,505,795 Exchangeable Shares, respectively) at July 31, 1999 and 1998, respectively... 214 213 Additional paid-in capital................................ 208,749 203,258 Accumulated earnings (from August 1, 1991 with respect to Digicon Inc.)........................................... 114,652 94,358 Accumulated comprehensive income: Cumulative foreign currency translation adjustment...... (4,352) (3,660) Unrealized loss on investments -- available for sale.... (557) Unearned compensation....................................... (602) (746) Treasury stock, at cost; 150,068 and 50,000 shares at July 31, 1999 and 1998, respectively........................... (2,546) (1,727) -------- -------- Total stockholders' equity......................... 315,558 291,696 -------- -------- Total.............................................. $541,846 $478,490 ======== ========
See Notes to Consolidated Financial Statements 15 18 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Operating activities: Net income................................................ $ 20,294 $ 66,958 $ 25,125 Non-cash items included in net income: Depreciation and amortization.......................... 68,435 56,121 40,631 Amortization of multi-client data library (Note 1)..... 1,563 689 2,604 Loss on disposition of property and equipment.......... 849 1,549 1,151 Equity in (earnings) loss of 50% or less-owned companies and joint ventures......................... 303 (972) (878) Deferred taxes......................................... 678 (7,314) (924) Amortization of unearned compensation.................. 466 Change in operating assets/liabilities: Accounts and notes receivable.......................... 32,053 (30,874) (55,499) Materials and supplies inventory....................... (311) (1,773) (674) Prepayments and other.................................. 8,386 (5,861) (2,230) Multi-client data library.............................. (87,967) (30,928) 2,120 Other.................................................. 5,364 (5,598) (4,282) Accounts payable and other accrued liabilities......... (27,905) 13,173 31,642 Income taxes payable................................... (5,210) 7,196 1,672 Other non-current liabilities.......................... 1,601 604 2,952 -------- -------- -------- Total cash provided by operating activities....... 18,599 62,970 43,410 Financing activities: Payments of secured term loans............................ (10,854) Payments of long-term debt................................ (310) (410) (24,976) Borrowings from long-term debt............................ 60,000 781 Net payments under credit agreements...................... (11,458) Borrowings from senior notes.............................. 75,000 Debt issue costs.......................................... (1,882) (2,765) Net proceeds from sale of common stock.................... 1,586 6,131 80,515 Purchase of treasury stock................................ (2,850) (1,727) -------- -------- -------- Total cash provided (used) by financing activities...................................... 56,544 3,994 106,243 Investing activities: (Increase) decrease in restricted cash investments........ (114) 364 (223) (Increase) decrease in investment in and advances to joint ventures............................................... 937 (567) Purchase of Time Seismic Exchange Ltd., net of cash received............................................... (704) Purchase of property and equipment........................ (42,366) (97,106) (89,112) Sale of property and equipment............................ 2,091 221 1,037 -------- -------- -------- Total cash used by investing activities........... (41,093) (95,584) (88,865) Currency (gain) loss on foreign cash...................... (692) (2,468) 317 -------- -------- -------- Change in cash and cash equivalents....................... 33,358 (31,088) 61,105 Beginning cash and cash equivalents balance............... 40,089 71,177 10,072 -------- -------- -------- Ending cash and cash equivalents balance.................. $ 73,447 $ 40,089 $ 71,177 ======== ======== ========
See Notes to Consolidated Financial Statements 16 19 VERITAS DGC INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Increase in property and equipment for: Execution of equipment purchase obligations............ 6,388 Accounts payable -- trade.............................. 10,004 2,443 550 Utilization of net operating losses existing prior to the quasi-reorganization resulting in an increase (decrease) in: Deferred tax asset valuation allowance................. (4,641) (1,630) (9,867) Additional paid-in capital............................. 4,641 1,630 9,867 Treasury stock issued for purchase of Time Seismic Exchange Ltd........................................... 664 Treasury stock issued in lieu of cash for bonuses payable................................................ 974 Treasury stock issued for future services resulting in an increase (decrease) in: Additional paid-in-capital............................. (126) Unearned compensation.................................. 280 Restricted stock issued for future services resulting in an increase in Additional paid-in-capital............................. 42 915 Unearned compensation.................................. 42 915 Settlement of accounts receivable for long term notes receivable, net........................................ 3,696 Settlement of accounts receivable and interest payments for investments -- available for sale.................. 3,809 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest (net of amounts capitalized) Senior notes......................................... 10,028 6,513 3,496 Equipment purchase obligations....................... 39 113 673 Secured term loans................................... 274 Credit agreements.................................... 53 403 Other................................................ 780 603 656 Income taxes........................................... 11,875 33,369 1,891
See Notes to Consolidated Financial Statements 17 20 VERITAS DGC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997
COMMON STOCK TREASURY STOCK, ACCUMULATED ISSUED AT COST EARNINGS (FROM ------------------ ------------------ ADDITIONAL AUGUST 1, 1991 ACCUMULATED PAR PAID-IN- WITH RESPECT TO UNEARNED COMPREHENSIVE SHARES VALUE SHARES COST CAPITAL DIGICON INC.) COMPENSATION LOSS ---------- ----- -------- ------- ---------- --------------- ------------ ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) BALANCE, JULY 31, 1996.... 11,334,352 $113 $104,469 $ 2,275 $ (934) Common stock issued for exchangeable stock...... 4,645,968 47 (47) Common stock issued for cash upon exercise of warrants................ 191,333 2 1,029 Common stock issued for cash under employee stock option plan....... 360,387 3 3,121 Common stock issued for cash, net of issue costs................... 3,450,000 35 76,416 Registration and filing costs................... (91) Utilization of net operating loss carryforwards existing prior to quasi-reorganization.... 9,867 Cumulative foreign currency translation adjustment.............. (129) Net income................ 25,125 ---------- ---- -------- ------- -------- -------- ----- ------- BALANCE, JULY 31, 1997.... 19,982,040 $200 $194,764 $ 27,400 $(1,063) Common stock issued for exchangeable stock...... 871,818 9 (9) Common stock issued for cash upon exercise of warrants................ 42,000 189 Common stock issued to employees............... 407,007 4 6,704 (746) Common stock reacquired for cash, including fees.................... (50,000) (1,727) Registration and filing costs................... (20) Utilization of net operating loss carryforwards existing prior to quasi-reorganization.... 1,630 Cumulative foreign currency transaction adjustment.............. (2,597) Net income................ 66,958 ---------- ---- -------- ------- -------- -------- ----- ------- BALANCE, JULY 31, 1998.... 21,302,865 $213 (50,000) $(1,727) $203,258 $ 94,358 $(746) $(3,660) Common stock issued for exchangeable stock...... 200 Common stock issued to employees............... 167,873 1 2,031 (42) Common stock reacquired for cash, including fees.................... (249,000) (3,917) Treasury stock issued under key contributor incentive plan.......... 80,272 1,626 (652) Treasury stock issued in connection with Time Seismic Exchange Ltd acquisition............. 44,898 1,066 (402) Treasury issued for services under restricted stock agreements.............. 23,762 406 (126) (280) Registration and filing costs................... (1) Utilization of net operating loss carryforwards existing prior to quasi-reorganization.... 4,641 Cumulative foreign currency transaction adjustment.............. (692) Amortization of Unearned Compensation............ 466 Loss on Investments -- Available for Sale................ (557) Net income................ 20,294 ---------- ---- -------- ------- -------- -------- ----- ------- BALANCE, JULY 31, 1999.... 21,470,938 $214 (150,068) $(2,546) $208,749 $114,652 $(602) $(4,909) ========== ==== ======== ======= ======== ======== ===== =======
18 21 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JULY 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION Veritas DGC provides geophysical data acquisition, data processing, multi-client data sales and exploration and development information services to the petroleum industry in selected markets worldwide. The accompanying consolidated financial statements include the accounts of Veritas DGC and all majority-owned domestic and foreign subsidiaries. Investments in a joint venture are accounted for on the equity method. All material intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION OF PRIOR YEAR BALANCES Certain prior year balances have been reclassified for consistent presentation. FAIR VALUE OF FINANCIAL INSTRUMENTS Veritas DGC Inc.'s financial instruments include cash and short-term investments, restricted cash investments, accounts and notes receivable, accounts payable and debt. The fair market value of the $135.0 million senior notes included in long-term debt and $3.9 million of related accrued interest is $137.4 million based on the present value of total payments due at Veritas DGC's current borrowing rate of 9 1/4% at July 31, 1999. The carrying value is a reasonable estimate of fair value for all other instruments. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires companies to record derivative financial instruments on the balance sheet as assets or liabilities, as appropriate, at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Veritas DGC will be required to implement this statement in its first quarter of fiscal year 2001. Veritas DGC believes that the implementation of this standard will not have a material adverse effect on Veritas DGC's consolidated financial position, results of operations or liquidity. TRANSLATION OF FOREIGN CURRENCIES Veritas DGC has determined that the United States ("U.S.") dollar is its primary functional currency and, accordingly, most foreign entities translate property and equipment (and related depreciation) and inventories into U.S. dollars at the exchange rate in effect at the time of their acquisition while other assets and liabilities are translated at year-end rates. Operating results (other than depreciation) are translated at the average rates of exchange prevailing during the year. The remaining foreign entities use the Canadian dollar as their functional currency and translate all assets and liabilities at year-end exchange rates and operating results at average exchange rates prevailing during the year. Adjustments resulting from the translation of assets and liabilities are recorded in the cumulative foreign currency translation adjustment account in stockholders' 19 22 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) equity. Remeasurement gains and losses are included in the determination of net income and are reflected in other costs and expenses. (See Note 10.) CASH EQUIVALENTS For purposes of the Consolidated Statements of Cash Flows, Veritas DGC has defined "cash equivalents" as items readily convertible into known amounts of cash with original maturities of three months or less. RESTRICTED CASH INVESTMENTS Restricted cash investments in the amounts of $300,000 and $186,000 at July 31, 1999 and 1998, respectively, were pledged as collateral on certain bank guarantees related to contracts entered into in the normal course of business. ACCOUNTS RECEIVABLE Included in accounts and notes receivable at July 31, 1999 and 1998 are unbilled amounts of approximately $35,209,000 and $43,058,000, respectively. Such amounts are either not billable to the customer at July 31 in accordance with the provisions of the contract and generally will be billed in one to four months or are currently billable and will be invoiced in the next monthly statement cycle. INVENTORIES Inventories of materials and supplies are stated at the lower of average cost or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on estimated useful lives as follows:
ESTIMATED USEFUL LIFE ---------------- Geophysical equipment................................ 3-5 Data processing equipment............................ 3 Geophysical ship..................................... 5 Leasehold improvements and other..................... 3-10
Expenditures for routine repairs and maintenance are charged to expense as incurred; expenditures for additions and improvements, including capitalized interest, are capitalized and depreciated over the estimated useful life of the related asset. The net gain or loss on property and equipment disposed of is included in other costs and expenses. (See Note 10.) MULTI-CLIENT DATA LIBRARY Veritas DGC collects and processes certain geophysical data for its own account to which it retains all ownership rights and which it resells to clients on a non-transferable, license basis. Veritas DGC capitalizes associated costs using an estimated sales method. Under that method the amount capitalized equals actual costs incurred less costs attributed to the precommitted sales contracts based on the percentage of total estimated costs to total estimated sales multiplied by actual sales. The capitalized cost of multi-client data library is likewise charged to cost of services in the period subsequent sales occur based on the percentage of total estimated costs to total estimated sales multiplied by actual sales. For marine surveys, any costs remaining 24 months after completion of a survey are charged to cost of services over a period not to exceed 24 months. For land surveys any costs remaining 36 months after completion of a survey are charged to cost of 20 23 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services over a period not to exceed 24 months. These periods of 48 and 60 months, respectively, represent the periods over which benefits are expected to be derived. Veritas DGC periodically reviews the carrying value of the multi-client data library to assess whether there has been a permanent impairment of value and records losses when it is determined that estimated sales would not be sufficient to cover the carrying value of the asset. GOODWILL Veritas DGC records the purchase price of businesses or joint venture interests in excess of the fair value of net assets acquired as goodwill which is amortized using the straight-line method over a period of 10 to 20 years which approximates the period in which benefits are expected to be derived. Veritas DGC periodically reviews the carrying value of goodwill in relation to the current and expected operating results of the businesses or joint ventures in order to assess whether there has been a permanent impairment of such amounts. MOBILIZATION COST Transportation and other expenses incurred prior to commencement of geophysical operations in an area, that would not have been incurred otherwise, are deferred and amortized over the lesser of the term of the related contract or backlog of contracts in that area or one year. Amounts applicable to operations for Veritas DGC's own account are included in the cost of the multi-client data library. Included in other assets at July 31, 1999 and 1998 are unamortized mobilization costs approximating $1,193,000 and $818,000, respectively. LEASES Operating leases include those for office space, specialized geophysical equipment rented for short periods of time, and Veritas DGC's geophysical ships which generally are chartered on a short-term basis. REVENUES Revenues from data acquisition and data processing services are recognized on the percentage-of-completion method measured by the amount of data collected or processed to the total amount of data to be collected or processed or by time incurred to total time expected to be incurred. Sales from the licensing of multi-client data surveys are recognized upon delivery of such data based upon agreed rates set forth in the contract. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense when incurred. Research and development costs for the years ended July 31, 1999, 1998 and 1997 were $7,693,000, $6,196,000 and $3,725,000, respectively. STOCK-BASED COMPENSATION Veritas DGC maintains stock-based compensation plans that are accounted for using the intrinsic value based method allowed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Under that method, compensation expense is recorded in the accompanying consolidated financial statements when the quoted market price of stock at the grant date or other measurement date exceeds the amount an employee must pay to acquire the stock. As required by SFAS No. 123, "Accounting for Stock-Based Compensation," the effect on net income and earnings per share of compensation expense that would have been recorded using the fair value based method is reported through disclosure. (See Note 7.) 21 24 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE The computation of earnings per share based upon weighted average common shares outstanding and earnings per share -- assuming dilution based upon weighted average common shares outstanding and additional common shares, utilizing the treasury stock method and average market prices, that would have been outstanding if dilutive potential common shares had been issued. (See Note 11.) 2. INVESTMENT IN INDONESIAN JOINT VENTURE Summarized financial information for Veritas DGC's 80% owned Indonesian joint venture (P.T. Digicon Mega Pratama) which is accounted for under the equity method due to provisions in the joint venture agreement that give minority shareholders the right to exercise control is as follows:
JULY 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Current assets.............................................. $ 1,380 $ 2,740 Property and equipment, net................................. 314 613 -------- -------- Total assets...................................... $ 1,694 $ 3,353 ======== ======== Current liabilities......................................... $ 438 $ 410 Advances from affiliates.................................... 12,479 13,847 Stockholders' deficit: Common stock.............................................. 2,576 2,576 Accumulated deficit....................................... (13,799) (13,480) -------- -------- Total stockholders' deficit....................... (11,223) (10,904) -------- -------- Total liabilities and stockholders' deficit....... $ 1,694 $ 3,353 ======== ========
FOR THE YEARS ENDED JULY 31, ----------------------------- 1999 1998 1997 ------- --------- ------- (IN THOUSANDS) Revenues................................................. $2,472 $ 3,346 $7,240 Cost and expenses: Cost of services....................................... 2,435 2,378 6,424 Depreciation and amortization.......................... 340 316 Other.................................................. (320) (62) ------ -------- ------ Total.......................................... 2,775 2,374 6,362 ------ -------- ------ Net income (loss)........................................ $ (303) $ 972 $ 878 ====== ======== ======
During the years ended July 31, 1999, 1998 and 1997, Veritas DGC charged P.T. Digicon $157,000 $368,000 and $1,429,000, respectively, relating to allocations of corporate administrative expenses and actual expenses incurred by P.T. Digicon for salary cost, insurance and equipment charges. Advances from Veritas DGC to P.T. Digicon of $12,479,000 and $13,847,000 at July 31, 1999 and 1998, respectively, have no formal repayment terms and do not bear interest. 22 25 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LONG-TERM DEBT Long-term debt is as follows:
JULY 31, -------------------- 1999 1998 -------- ------- (IN THOUSANDS) Senior notes due October 2003, at 9 3/4%.................... $135,000 $75,000 Equipment purchase obligations maturing through September 2000, at 10%.............................................. 251 561 -------- ------- Total............................................. 135,251 75,561 Less current maturities..................................... 240 289 -------- ------- Due after one year................................ $135,011 $75,272 ======== =======
The senior notes are due in October 2003 with interest payable semi-annually at 9 3/4% per annum. The senior notes are unsecured and are effectively subordinated to all secured debt of Veritas DGC with respect to the assets securing such debt and to all debt of its subsidiaries whether secured or unsecured. The indenture relating to the senior notes contains certain covenants which limit Veritas DGC's ability to, among other things, incur additional debt, pay dividends and complete mergers, acquisitions and sales of assets. Upon a change in control of Veritas DGC, as defined in the indenture, the holders of the senior notes have the right to require Veritas DGC to purchase all or a portion of such holder's senior note at a price equal to 101% of the aggregate principal amount. Veritas DGC has the right to redeem the senior notes, in whole or part, on or after October 15, 2000. Under certain conditions, Veritas DGC may redeem up to $35.0 million in aggregate principal amount of the senior notes prior to October 15, 1999. Veritas DGC maintains a revolving credit facility, expiring July 2001, with commercial lenders that provides for advances up to the lesser of $50.0 million or a defined borrowing base (32.1 million at July 31, 1999). Advances bear interest, at Veritas DGC's election, at LIBOR or prime rate (8% at July 31, 1999) plus a margin based on certain financial ratios maintained by Veritas DGC. Advances are secured by certain accounts receivable for a limited amount. Covenants in the agreement limit, among other things, Veritas DGC's right to take certain actions, including creating secured indebtedness. In addition, the agreement requires Veritas DGC to maintain certain financial ratios. No advances were outstanding at July 31, 1999 and July 31, 1998 under the credit agreement, although $5.8 million in letters of credit had been issued under the facility. Veritas DGC's equipment purchase obligations represent installment loans and capitalized lease obligations primarily related to computer and geophysical equipment. Annual maturities of long-term debt for the next five years are as follows:
ANNUAL FISCAL YEAR MATURITIES - ----------- -------------- (IN THOUSANDS) 2000.................................................. $ 240 2001.................................................. 11 2004.................................................. 135,000 -------- Total....................................... $135,251 ========
During the year ended July 31, 1999, Veritas DGC incurred interest costs of $12,808,000. Of this amount, for the years ended July 31, 1999 and 1998 Veritas DGC capitalized $185,000 and $800,000, respectively. The capitalized amount represents costs for leasehold improvements to a chartered vessel. No interest was capitalized during the years ended July 31, 1997. 23 26 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. OTHER ACCRUED LIABILITIES Other accrued liabilities include the following:
JULY 31, JULY 31, 1999 1998 -------- -------- (IN THOUSANDS) Accrued payroll and benefits................................ $ 5,518 $12,216 Deferred revenues........................................... $10,717 $19,196 Accrued taxes other than income............................. $12,086 $ 9,556
5. INCOME TAXES Pretax income was taxed under the following jurisdictions:
FOR THE YEARS ENDED JULY 31, ---------------------------- 1999 1998 1997 ------- -------- ------- (IN THOUSANDS) U.S. .................................................. $34,560 $ 90,690 $21,098 Non-U.S................................................ (4,397) 9,514 9,211 ------- -------- ------- Total........................................ $30,163 $100,204 $30,309 ======= ======== =======
The provision for income taxes consists of the following:
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Current -- U.S. ........................................ $ 4,916 $36,616 $ 3,352 Deferred -- U.S. ....................................... 3,939 (5,469) (2,940) Current -- Non-U.S...................................... 3,742 4,952 3,634 Deferred -- Non-U.S..................................... (3,031) (1,881) 2,016 ------- ------- ------- Total......................................... $ 9,566 $34,218 $ 6,062 ======= ======= =======
A reconciliation of income tax expense computed at the U.S. statutory rate to the provision reported in the consolidated statements of income is as follows:
FOR THE YEARS ENDED JULY 31, ---------------------------- 1999 1998 1997 ------- ------- -------- (IN THOUSANDS) Income tax at the U.S. statutory rate.................. $10,557 $35,071 $ 10,608 Increase (reduction) in taxes resulting from: Non-U.S. earnings taxed at other than the U.S. statutory rate.................................... (1,719) (1,349) 1,159 Write-off of investment.............................. (10,126) Contingency.......................................... 1,661 1,036 2,877 Non-U.S. losses with no tax recovery................. 1,584 650 (247) Foreign tax credit net of withholding tax............ (7,466) (9,714) 403 U.S. tax on Subpart F income and dividends........... 4,711 6,688 U.S. tax on branch operations........................ 182 2,567 501 Prior year tax return to tax provision reconciliation.................................... (771) (366) 344 State Income Tax..................................... 474 590 274 Other................................................ 353 (955) 269 ------- ------- -------- Total........................................ $ 9,566 $34,218 $ 6,062 ======= ======= ========
24 27 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes result from the effect of transactions that are recognized in different periods for financial and tax reporting purposes. The primary components of Veritas DGC's deferred tax assets and liabilities are as follows:
JULY 31, ------------------------- 1999 1998 ----------- ----------- (IN THOUSANDS OF DOLLARS) Deferred tax assets: Difference between book and tax basis of property and equipment.............................................. $ 6,162 $ 4,067 Difference between book and tax basis of multi-client data library................................................ 18,107 20,402 Net operating loss carryforwards.......................... 37,121 36,111 Tax credit carryforwards.................................. 19 334 -------- -------- Total............................................. 61,409 60,914 Deferred tax liabilities.................................... (211) (952) -------- -------- Net deferred tax asset...................................... 61,198 59,962 Valuation allowance......................................... (38,078) (40,805) -------- -------- Net deferred tax asset...................................... $ 23,120 $ 19,157 ======== ========
A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance is then adjusted when the realization of deferred tax assets becomes more likely than not. Adjustments are also made to recognize the expiration of net operating loss and investment tax credit carryforwards, with equal and offsetting adjustments to the related deferred tax asset. Should Veritas DGC's income projections result in the conclusion that realization of additional deferred tax assets is more likely than not, further adjustments to the valuation allowance are made. Since Veritas DGC's quasi-reorganization with respect to Digicon on July 31, 1991 the tax benefits of net operating loss carryforwards existing at the date of the quasi-reorganization have been recognized through a direct addition to paid-in capital, when realization is more likely than not. The net reductions in the valuation allowance of $2,727,000 during 1999 and $1,679,000 in 1998 resulted primarily from recognition of the expected utilization of net operating loss carryforwards generated prior to the quasi-reorganization and the expiration of investment tax credits. As of July 31, 1999, Veritas DGC had U.S. net operating loss carryforwards of approximately $69,088,000 and investment tax credit carryforwards of approximately $19,000. Approximately $44,546,000 of net operating loss carryforwards and all of the investment tax credit carryforwards existed prior to the quasi- 25 28 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reorganization. The following schedule sets forth the expiration dates of the U.S. and non-U.S. net operating losses.
U.S. NET NON-U.S. NET FISCAL YEAR OPERATING LOSS OPERATING LOSS - ----------- -------------- -------------- (IN THOUSANDS) 2000.............................................. $ 2,739 173 2001.............................................. 30,032 210 2002.............................................. 1,334 2003.............................................. 4,222 5,186 2004.............................................. 6,355 2,736 2005.............................................. 1,198 2006.............................................. 1,347 6,849 2007.............................................. 2,505 2009.............................................. 7,994 114 2010.............................................. 2,710 2011.............................................. 9,986 Indefinite........................................ 19,396 ------- ------- Total................................... $69,088 $35,998 ======= =======
Internal Revenue Service regulations restrict the utilization of U.S. net operating loss carryforwards and other tax benefits (such as investment tax credits) for any company in which an "ownership change" (as defined in Section 382 of the Internal Revenue Code) has occurred. Veritas DGC has performed the required testing and has concluded that two "ownership changes" have occurred. The first occurred in connection with the issuance of common stock through a public offering made by Veritas DGC on January 6, 1992. The utilization of U.S. net operating loss carryforwards existing at the date of the first "ownership change" is limited to approximately $4,041,000 per year. The second "ownership change" occurred on August 30, 1996 as a result of the stock acquisition of Veritas Energy Services Inc. The utilization of U.S. net operating losses incurred between the first and second ownership changes is limited to approximately $8,875,000 per year, which includes the limitation of approximately $4,041,000 from the first ownership change. The second limitation also applies to the limitation from the first ownership change that accumulated during the periods between the first and second ownership changes. During the years ended July 31, 1999 and 1998, Veritas DGC utilized approximately $8,875,000 and $8,875,000 of limitation carryover, respectively. Non-U.S. operations had net operating loss carryforwards of approximately $35,998,000 at July 31, 1999, of which approximately $13,166,000 existed prior to the quasi-reorganization. Approximately $15,457,000 of the total non-U.S. net operating loss carryforwards are related to United Kingdom operations, have an indefinite carryforward period, and are available to offset future profits in Veritas DGC's current trade or business. Approximately $12,092,000 of the United Kingdom net operating loss carryforwards existed prior to the quasi-reorganization. Approximately $6,054,000 of the total non-U.S. net operating loss carryforwards are related to Oman operations, were generated after the quasi-reorganization and have a carryforward period of five years. Veritas DGC considers the undistributed earnings of its non-U.S. subsidiaries to be permanently reinvested. Veritas DGC has not provided deferred U.S. income tax on those earnings, as it is not practicable to estimate the amount of additional tax that might be payable should these earnings be remitted or deemed remitted as dividends or if Veritas DGC should sell its stock in the subsidiaries. 26 29 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENT LIABILITIES Total rentals of vessels, equipment and office facilities charged to operations amounted to $62,473,000, $57,476,000 and $37,332,000 for the years ended July 31, 1999, 1998 and 1997, respectively. Minimum rentals payable under operating leases, principally for office space and vessel charters with remaining noncancellable terms of at least one year are as follows:
FISCAL YEAR MINIMUM RENTALS - ----------- ---------------- (IN THOUSANDS) 2000................................................. $30,083 2001................................................. 19,410 2002................................................. 15,090 2003................................................. 13,309 2004................................................. 13,300 2005-2013............................................ 35,586
During 1993 Veritas DGC purchased occurrence-based workers compensation insurance. The policies for the years ended July 31, 1999 and 1998 were issued under a guaranteed cost program and, accordingly, there were no deductibles. Management has evaluated the adequacy of the accrual for the liability for incurred but unreported workers compensation claims and has determined that the ultimate resolution of any such claims would not have a material adverse impact on the financial position of Veritas DGC. 7. EMPLOYEE BENEFITS Veritas DGC maintains a 401(k) plan in which employees of Veritas DGC's majority-owned domestic subsidiaries and certain foreign subsidiaries are eligible to participate. However, employees of foreign subsidiaries who are covered under a foreign deferred compensation plan are not eligible. Employees are permitted to make contributions of up to 10% of their salary to a maximum of $9,500 per year. Generally, Veritas DGC will contribute an amount equal to one-half of the employee's contribution of up to $8,000 or 8% of the employee's salary (whichever is less); however, if consolidated pre-tax income for any fiscal year is less than the amount required to be contributed by Veritas DGC, Veritas DGC may elect to reduce its contribution, but in no event may it reduce the total contribution to less than 25% of the employee contribution. Veritas DGC may make additional contributions from its current or cumulative net profits in an amount determined by the Board of Directors. Veritas DGC's matching contributions to the 401(k) plan were $741,000 in 1999, $679,000 in 1998 and $426,000 in 1997. Veritas DGC has an employee nonqualified stock option plan under which options are granted to officers and key employees. Options generally vest over a period of time and are exercisable over a ten-year period but may not be exercised earlier than six months after the grant date. The exercise price for each option shall not be less than the lesser of (i) the fair market value of the common stock on the grant date or (ii) the average fair market value of the common stock during the 30 trading days ending on the trading day next preceding the grant date. Veritas DGC has authorized 3,954,550 shares of common stock to be issued under the plan. Veritas DGC also has a stock option plan for non-employee directors (the "Director Plan") under which options are granted to non-employee directors of Veritas DGC. The Director Plan provides that every year each eligible director is granted options to purchase 5,000 shares of Veritas DGC's common stock which vest over periods up to four years and are exercisable over ten years. The exercise price for each option granted is 27 30 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fair market value at the date of grant, as defined. Veritas DGC has authorized 600,000 shares of common stock to be issued under the Director Plan.
FOR THE YEAR ENDED JULY 31, 1999 -------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE GRANT AVERAGE NUMBER OF AVERAGE DATE FAIR CONTRACTUAL SHARES EXERCISE PRICE VALUE LIFE --------- -------------- ------------- ----------- Beginning balance............................ 1,022,539 $18.00 Options granted.............................. 1,019,824 $11.08 7.55 10 Options exercised............................ (23,883) $ 9.81 Options forfeited............................ (90,432) $18.91 --------- Ending balance............................... 1,928,048 $14.43 ========= Options exercisable.......................... 789,781 $14.15 ========= Ending balance by range of exercise price: $ 4.13-$ 6.20.............................. 99,081 $ 5.72 5.2 $ 6.20-$ 9.29.............................. 89,787 $ 7.30 3.8 $ 9.29-$13.94.............................. 1,004,456 $10.92 9.2 $13.94-$20.91.............................. 647,845 $19.35 7.4 $20.91-$31.36.............................. 27,232 $25.39 7.8 $31.36-$47.04.............................. 55,820 $39.57 7.8 $47.04-$56.50.............................. 3,827 $52.58 7.9 --------- Ending balance.......................... 1,928,048 ========= Options exercisable by range of exercise price: $ 4.13-$ 6.20.............................. 99,081 $ 5.72 $ 6.20-$ 9.29.............................. 89,787 $ 7.30 $ 9.29-$13.94.............................. 282,475 $11.26 $13.94-$20.91.............................. 281,010 $19.38 $20.91-$31.36.............................. 11,889 $25.27 $31.36-$47.04.............................. 24,316 $39.41 $47.04-$56.50.............................. 1,223 $52.63 --------- Options exercisable..................... 789,781 =========
FOR THE YEAR ENDED JULY 31, 1998 ------------------------------------------- WEIGHTED WEIGHTED AVERAGE GRANT NUMBER OF AVERAGE DATE FAIR SHARES EXERCISE PRICE VALUE ---------- -------------- ------------- Beginning balance...................................... 1,276,364 $15.18 Options granted........................................ 133,426 $30.95 $21.41 Options exercised...................................... (326,733) $11.94 Options forfeited...................................... (60,518) $19.78 ---------- Ending balance......................................... 1,022,539 $18.00 ========== Options exercisable.................................... 366,482 $12.38 ==========
28 31 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED JULY 31, 1997 ------------------------------------------- WEIGHTED WEIGHTED AVERAGE GRANT NUMBER OF AVERAGE DATE FAIR SHARES EXERCISE PRICE VALUE ---------- -------------- ------------- Beginning balance...................................... 837,840 $ 8.30 Options granted........................................ 837,241 $19.38 $13.66 Options exercised...................................... (360,385) $ 8.82 Options forfeited...................................... (38,332) $16.30 ---------- Ending balance......................................... 1,276,364 $15.18 ========== Options exercisable.................................... 467,536 $ 7.93 ==========
The weighted average fair values of options granted are determined using the Black-Scholes option valuation method assuming no expected dividends. Other assumptions used are as follows:
FOR THE YEARS ENDED JULY 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Risk-free interest rate........................... 5.5% 6.1% 6.6% Expected volatility............................... 49.7% 49.6% 50.2% Expected life..................................... 10.0 years 10.0 years 10.0 years
In conjunction with certain employment agreements, Veritas DGC issued 13,025 and 10,000 shares of restricted stock with weighted average grant date fair values of $33.66 and $20.25 per share, respectively, during the years ended July 31, 1998 and 1997, respectively, to certain individuals in exchange for services rendered over a three-year period. On November 1, 1997, Veritas DGC initiated a compensatory employee stock purchase plan for up to 500,000 shares of common stock. Participation is voluntary and substantially all full-time employees meeting limited eligibility requirements may participate. Contributions are made through payroll deductions and may not be less than 1% or more than 15% of the participant's base pay as defined. The participant's option to purchase common stock is deemed to be granted on the first day and exercised on the last day of the fiscal quarter at a price which is the lower of 85% of the market price on the first or last day of the fiscal quarter. During the year ended July 31, 1999, 142,490 shares of common stock were issued with a weighted average grant date fair value of $14.71 per share. During the year ended July 31, 1998, 52,731 shares of common stock were issued with a weighted average grant date fair value of $35.37 per share. On June 9, 1998, Veritas DGC initiated a restricted stock plan for up to 50,000 shares. The eligibility of an employee and the terms and amount of the grant are determined by the Board of Directors' Compensation Committee. The following restricted shares were issued for the fiscal years ended 1999 and 1998.
YEAR ENDED JULY 31, 1999 - ------------------------------------------------------------- WEIGHTED NUMBER OF AVERAGE GRANT SHARES GRANTED GRANT DATE PRICE VESTING PERIOD - -------------- ----------- ------------- -------------- 1,500 August 1998 $27.81 3 Years 25,579 March 1999 $11.31 1 Year
29 32 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED JULY 31, 1998 - ------------------------------------------------------------- WEIGHTED NUMBER OF AVERAGE GRANT SHARES GRANTED GRANT DATE PRICE VESTING PERIOD - -------------- ----------- ------------- -------------- 3,000 June 1998 $46.75 3 Years 1,400 July 1998 $35.25 3 Years
Compensation expense relating to the stock-based compensation plans described above was $466,000, $506,000, and $23,000 for the years ended July 31, 1999, 1998, and 1997, respectively. The effect on net income and earnings per share that would have been recorded using the fair value based method as required by SFAS 123 is as follows:
FOR THE YEARS ENDED JULY 31, ---------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported net income.................................. $20,294 $66,958 $25,125 ======= ======= ======= Pro forma net income................................. $17,215 $64,498 $24,138 ======= ======= ======= Reported net income per common share -- basic........ $ 0.89 $ 2.96 $ 1.33 ======= ======= ======= Pro forma earnings per common share -- basic......... $ 0.76 $ 2.85 $ 1.28 ======= ======= ======= Reported net income per common share -- diluted...... $ 0.88 $ 2.87 $ 1.30 ======= ======= ======= Pro forma earnings per common share -- diluted....... $ 0.75 $ 2.77 $ 1.25 ======= ======= =======
The effect on net income and earnings per share may not be representative of the effects on future net income and earnings per share because some options vest over several years and additional awards may be granted. Veritas DGC maintains a contributory defined benefit pension plan (the "Pension Plan") for eligible participating employees in its United Kingdom offices. Monthly contributions by employees are equal to 4% of their salaries with Veritas DGC providing an additional contribution in an actuarially determined amount necessary to fund future benefits to be provided under the Pension Plan. Benefits provided are based upon 1/60 of the employee's final pensionable salary (as defined) for each complete year of service up to 2/3 of the employee's final pensionable salary and increase annually in line with inflation subject to a maximum of 5% per annum. The Pension Plan also provides for 50% of such actual or expected benefits to be paid to a surviving spouse upon the death of a participant. Pension Plan assets consist mainly of investments in marketable securities which are held and managed by an independent trustee. The net periodic pension costs are as follows:
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Service costs (benefits earned during the period)........... $ 578 $ 457 $ 238 Interest costs on projected benefit obligation.............. 581 441 384 Actual return on plan assets................................ (491) (695) (392) Net amortization and deferral............................... 159 224 5 ----- ----- ----- Net periodic pension costs.................................. $ 827 $ 427 $ 235 ===== ===== =====
30 33 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The funded status of the Pension Plan is as follows:
JULY 31, ----------------- 1999 1998 ------- ------- (IN THOUSANDS) Plan assets at fair value................................... $ 7,573 $ 6,443 Projected benefit obligation: Actuarial present value of accumulated vested benefit obligations............................................ 10,060 7,400 Effect of future salary increases......................... 2,420 1,492 ------- ------- Total projected benefit obligation................ 12,480 8,892 ------- ------- Projected benefit obligation in excess of plan assets....... (4,907) (2,449) Unrecognized prior service cost............................. Unrecognized net loss....................................... 2,948 2,243 ------- ------- Pension liability........................................... $(1,959) $ (206) ======= =======
The weighted average assumptions used to determine the projected benefit obligation and the expected long-term rate of return on assets are as follows:
FOR THE YEARS ENDED JULY 31, --------------------- 1999 1998 1997 ----- ----- ----- Discount rate............................................... 6.0% 6.5% 8.0% Rates of increase in compensation levels.................... 4.0% 4.5% 6.0% Expected long-term rate of return on assets................. 6.5% 7.0% 8.5%
The following is a reconciliation of the beginning and ending balances of the benefit obligation and the fair value of plan assets:
JULY 31, ---------------- 1999 1998 ------- ------ (IN THOUSANDS) Benefit obligation at beginning of year..................... $ 8,892 $5,479 Service cost................................................ 578 457 Interest cost............................................... 581 441 Contributions by plan participants.......................... 249 198 Actuarial gains and losses.................................. 2,237 2,367 Benefits paid............................................... (57) (50) ------- ------ Benefit obligation at end of year........................... $12,480 $8,892 ======= ====== Fair value of plan assets at beginning of year.............. $ 6,443 $5,277 Actual return on plan assets................................ 491 695 Employer contribution....................................... 447 323 Plan participants' contributions............................ 249 198 Benefits paid............................................... (57) (50) ------- ------ Fair value of plan assets at end of year.................... $ 7,573 $6,443 ======= ======
8. UNREALIZED LOSS ON INVESTMENTS -- AVAILABLE FOR SALE In April 1999, Veritas DGC exchanged a $4.7 million account receivable from Miller Exploration Company (Miller), a publicly traded company, for a long term note receivable paying 18% interest. Interest is paid in common stock warrants, with an exercise price of $0.01 per share, in advance, at six month intervals. 31 34 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The common stock underlying these warrants was registered with the SEC in August 1999. In addition, Veritas DGC Inc. exchanged an account receivable from Brigham Exploration Company (Brigham), a publicly traded company, for shares of Brigham common stock. The cost basis of the investments available for sale is determined by the fair market value on the date received.
JULY 31, 1999 --------------------------------- UNREALIZED FAIR COST BASIS (LOSS)/GAIN VALUE ---------- ----------- ------ Brigham common stock.................................. $3,809 $(1,143) $2,666 Miller Warrants....................................... 419 586 1,005 ------ ------- ------ $4,228 $ (557) $3,671 ====== ======= ======
9. COMMON AND PREFERRED STOCK The Board of Directors, without any action by the stockholders, may issue up to one million shares of preferred stock, par value, $.01, in one or more series and determine the voting rights, preferences as to dividends and in liquidation and the conversion and other rights of such stock. There are no shares of preferred stock outstanding as of July 31, 1999. On May 27, 1997, the Board of Directors of Veritas DGC declared a distribution of one right for each outstanding share of common stock or Exchangeable Stock to shareholders of record at the close of business on June 12, 1997 and designated 400,000 shares of the authorized preferred stock as a class to be distributed under a shareholder rights agreement. Upon the occurrence of certain events enumerated in the shareholder rights agreement, each right entitles the registered holder to purchase a fraction of a share of Veritas DGC's preferred stock or the common stock of an acquiring company. The rights, among other things, will cause substantial dilution to a person or group that attempts to acquire Veritas DGC. The rights expire on May 15, 2007 and may be redeemed prior to that date. In July 1998, the Board of Directors approved a stock repurchase program under which Veritas DGC is authorized to buy up to 1,000,000 shares of its outstanding common stock in open market transactions. At July 31, 1999, Veritas DGC had repurchased 299,000 shares and the program had expired. 10. OTHER COSTS AND EXPENSES Other costs and expenses consist of the following:
FOR THE YEARS ENDED JULY 31, ----------------------------- 1999 1998 1997 -------- -------- ------- (IN THOUSANDS) Net foreign currency exchange (gains) losses............. $(1,845) $ 2,333 $ 46 Net loss on disposition of property and equipment........ 849 1,549 1,151 Interest income.......................................... (4,210) (4,220) (552) Other.................................................... 156 (15) ------- ------- ------ Total.......................................... $(5,050) $ (338) $ 630 ======= ======= ======
32 35 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. EARNINGS PER COMMON SHARE Earnings per common share and earnings per common share -- assuming dilution are computed as follows:
FOR THE YEARS ENDED JULY 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income................................................. $20,294 $66,958 $25,125 ======= ======= ======= Weighted average common shares............................. 22,733 22,594 18,898 ======= ======= ======= Net income per common share -- basic....................... $ .89 $ 2.96 $ 1.33 ======= ======= ======= Weighted average common shares -- diluted: Weighted average common shares........................... 22,733 22,594 18,898 Shares issuable from assumed conversion of: Options............................................... 268 721 432 Warrants.............................................. 34 ------- ------- ------- Total............................................ 23,001 23,315 19,364 ======= ======= ======= Net income per common share -- diluted..................... $ .88 $ 2.87 $ 1.30 ======= ======= =======
The following options to purchase common shares have been excluded from the computation assuming dilution for the years ended July 31, 1999 and 1998 because the options' exercise price exceeded the average market price of the underlying common shares. There were no anti-dilutive options for the year ended July 31, 1997.
FOR THE YEARS ENDED JULY 31, ---------------------------- 1999 1998 -------------- ----------- Number of options............................... 807,992 22,810 Exercise price range............................ $16 7/8 - $56 1/2 $42 - $56 1/2 Expiring through................................ November 2008 July 2008
12. SEGMENT AND GEOGRAPHICAL INFORMATION In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." It requires Veritas DGC to disclose certain financial information in both annual and interim reporting about "operating segments." Operating segments are components of a company that are evaluated regularly by management in deciding how to allocate its resources and in assessing its performance. The statement also requires disclosure about the countries from which Veritas DGC derives its revenues and in which it employs its long-lived assets. Because Veritas DGC's operations consist of one segment, geophysical technology, no specific segment disclosure is required. The geographical information required is presented below. 33 36 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables presents consolidated revenues by country based on the location of the use of the product or service for the years ended July 31, 1999, 1998 and 1997:
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Geographic areas: Europe............................................. $ 35,850 $ 51,089 $ 42,798 Middle East / Africa............................... 20,785 14,090 6,370 Asia Pacific....................................... 35,091 42,462 30,232 Latin America...................................... 61,187 93,494 51,276 Canada............................................. 32,325 47,059 52,141 United States...................................... 203,667 280,765 179,898 -------- -------- -------- Totals..................................... $388,905 $528,959 $362,715 ======== ======== ========
The following table presents long-lived assets by country based on the location of the asset.
FOR THE YEARS ENDED JULY 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Geographic areas: Europe............................................. $ 11,877 $ 39,780 $ 10,231 Middle East / Africa............................... 6,859 8,336 9,712 Asia Pacific....................................... 16,186 21,974 12,991 Latin America...................................... 10,246 10,893 16,702 Canada............................................. 6,609 13,008 17,458 United States...................................... 104,594 80,929 65,660 -------- -------- -------- Totals..................................... $156,371 $174,920 $132,754 ======== ======== ========
During fiscal year 1999 Royal Dutch/Shell and its subsidiaries accounted for about 12% of Veritas DGC's revenue. No other customer accounted for 10% or more of revenue in fiscal year 1999. No single customer accounted for 10% or more of revenue in fiscal years 1998 and 1997. Veritas DGC generates its revenue in the exploration and production ("E&P") sector of the petroleum industry and as such, is subject to fluctuations in E&P spending. E&P spending is directly related to the prices of oil and gas which are subject to wide and relatively unpredictable variations. 13. SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
FOR THE YEAR ENDED JULY 31, 1999 ----------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues........................................ $146,799 $101,652 $74,610 $65,844 Gross profit.................................... 43,288 31,637 24,980 23,000 Net income...................................... 13,622 5,436 505 731 Net income per common share -- basic*........... .60 .24 .02 .03 Net income per common share -- diluted*......... .60 .24 .02 .03
34 37 VERITAS DGC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED JULY 31, 1998 ----------------------------------------------------- 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues........................................ $142,186 $123,569 $122,810 $140,394 Gross profit.................................... 48,933 42,765 47,429 42,936 Net income...................................... 21,319 17,677 16,062 11,900 Net income per common share -- basic*........... .95 .79 .71 .52 Net income per common share -- diluted*......... .94 .76 .69 .51
* Quarterly per share amounts may not total to annual per share amounts because weighted average common shares for the quarter may vary from weighted average common shares for the year. 14. SUBSEQUENT EVENTS SHELF REGISTRATION On August 31, 1999, Veritas DGC filed a shelf registration with the SEC allowing the issuance of up to $200 million in debt, preferred stock or common stock. A prospectus supplement fully describing the terms of each offering will be filed for each future issuance under this registration statement. CORPORATE HEADQUARTERS On September 10, 1999, Veritas DGC entered into a contract related to the construction and lease of a new corporate headquarters in Houston, Texas. Pursuant to the agreement, the developer purchased 18.5 acres of land from Veritas DGC for $4.2 million, will build a 220,000 sq. ft. office complex, and will lease the facility to Veritas DGC for fifteen years. Veritas DGC expects to move its 500 Houston employees, currently occupying five facilities, into the complex in October 2000. ENERTEC ACQUISITION On September 30, 1999, Veritas DGC, VESI and Enertec Resource Services Inc., a Canadian company, consummated a business combination (the "Combination") whereby Enertec became a wholly owned subsidiary of VESI. As a result of the Combination, each share of Enertec stock was converted into the right to receive VESI Class A Exchangeable Series 1 stock (the "Exchangeable" shares) at an exchange ratio of 0.345 of a share of the Exchangeable stock for each share of Enertec. All of the holders of Enertec common shares became holders of Exchangeable shares and accordingly, 2,437,527 shares of Exchangeable stock were issued. Each Exchangeable share is convertible, at the option of the shareholder, into one share of Veritas DGC's common stock. Outstanding options to purchase shares of Enertec stock were converted into options to purchase shares of Veritas DGC's common stock at the exchange ratio of 0.345 of a Veritas DGC stock option for each Enertec option. The total purchase price of Enertec is estimated at $29.6 million, which is comprised of $24.5 million of stock, $2.5 million of Veritas DGC options and $2.6 million of business combination costs. The preliminary allocation of purchase price, in accordance with APB 16, yields approximately $7.0 million of current assets, $20.7 million of property and long-term assets, $4.2 million of current liabilities, $0.1 million of long term liabilities and $6.2 million of goodwill. This allocation is subject to adjustment over the next fiscal year. DEBT REPURCHASE On September 24, 1999, Veritas DGC repurchased $5.5 million of 9 3/4% senior notes on the open market at a price of $5.7 million. 35 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is incorporated by reference to the material appearing under the headings "Election of Directors -- Nominees" and "Other Information -- Executive Officer Tenure and Identification" in the Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material appearing under the heading "Other Information -- Executive Compensation" in the Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference to the material appearing under the headings "Election of Directors" and "Other Information -- Certain Stockholders" in the Proxy Statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Other Information -- Certain Transactions" in the Proxy Statement for the 1999 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER ----------- Report of Independent Accountants........................... 13 Consolidated Statements of Income and Comprehensive Income for the Three Years Ended July 31, 1999................... 14 Consolidated Balance Sheets as of July 31, 1999 and 1998.... 15 Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1999....................................... 16-17 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended July 31, 1999................... 18 Notes to Consolidated Financial Statements.................. 19-35
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES All other financial statement schedules are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or the notes thereto. Individual financial statements of 50% or less-owned companies and joint ventures accounted for by the equity method have been omitted because such 50% or less-owned companies and joint ventures, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. FORM 8-K REPORTS DURING THE QUARTER ENDED JULY 31, 1999 No Form 8-K reports were filed during the quarter ended July 31, 1999. 36 39 EXHIBIT INDEX
EXHIBIT ------- 3-A) -- Restated Certificate of Incorporation with amendments of Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) -- Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) -- By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) *3-D) -- Certificate of Amendment to Restated Certificate of Incorporation of Veritas DGC Inc. dated September 30, 1999. 4-A) -- Specimen certificate for Senior Notes (Series A). (Included as part of Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-B) -- Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-C) -- Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996 is incorporated herein by reference.) 4-D) -- Rights Agreement between Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27, 1997 is incorporated herein by reference.) 4-E) -- Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-48953 dated March 31, 1998 is incorporated herein by reference.) 4-F) -- Restricted Stock Plan as Amended and Restated September 14, 1999. (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-87223 dated September 16, 1999 is incorporated herein by reference.) 4-G) -- Key Contributor Incentive Plan as Amended and Restated dated March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s Registration Statement No. 333-74305 dated March 12, 1999 is incorporated herein by reference.) 4-H) -- Specimen for Senior Notes (Series C). (Exhibit 4-K to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 1999 is incorporated herein by reference.) 4-I) -- Indenture relating to the 9 3/4% Senior Notes due 2003, Series B and Series C of Veritas DGC Inc. between Veritas DGC Inc. and State Street Bank and Trust Company dated October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s Current Report on Form 8-K dated November 12, 1998 is incorporated herein by reference.) 9-A) -- Voting and Exchange Trust Agreement dated August 30, 1996 among Digicon Inc., Veritas Energy Services Inc. and the R-M Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) *9-B) -- Voting and Exchange Trust Agreement dated September 30, 1999 among Veritas DGC Inc., Veritas Energy Services Inc. and CIBC Mellon Trust Company.
37 40
EXHIBIT ------- 10-A) -- Support Agreement dated August 30, 1996 between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K dated August 30, 1996 is incorporated herein by reference.) 10-B) -- Second Amended and Restated 1992 Non-Employee Director Stock Option Plan. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) *10-C) -- Fifth Amended and Restated 1992 Employee Nonqualified Stock Option Plan. 10-D) -- 1997 Employee Stock Purchase Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-38377 dated October 21, 1997 is incorporated herein by reference.) 10-E) -- Restricted Stock Agreement dated April 1, 1997 between Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-F) -- Employment Agreement executed by David B. Robson. (Exhibit 10-L to Veritas Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-G) -- Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-H) -- Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-I) -- Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) *10-J -- Employment Agreement executed by Timothy L. Wells. 10-K) -- Credit Agreement dated July 27, 1998 among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1998 is incorporated herein by reference.) 10-L) -- First Amendment to Credit Agreement among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein dated October 23, 1998. (Exhibit 10-L to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) 10-M) -- Second Amendment to Credit Agreement among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein dated November 20, 1998. (Exhibit 10-M to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) *21) -- Subsidiaries of the Registrant. *23) -- Consent of PricewaterhouseCoopers LLP. *27) -- Financial Data Schedule for the year ended July 31, 1999. (Filed electronically herewith.)
- --------------- * Filed herewith 38 41 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on the 15th day of October, 1999. VERITAS DGC INC. By: /s/ DAVID B. ROBSON ------------------------------------- David B. Robson (Chairman of the Board and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant in the indicated capacities have signed this report below on the 15th day of October, 1999.
SIGNATURE TITLE --------- ----- /s/ DAVID B. ROBSON Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer, Director David B. Robson /s/ STEPHEN J. LUDLOW Vice Chairman, Director - ----------------------------------------------------- Stephen J. Ludlow /s/ TIMOTHY L. WELLS President and Chief Operating Officer - ----------------------------------------------------- Timothy L. Wells /s/ ANTHONY TRIPODO Executive Vice President, - ----------------------------------------------------- Chief Financial Officer and Treasurer Anthony Tripodo /s/ CLAYTON P. CORMIER Director - ----------------------------------------------------- Clayton P. Cormier /s/ RALPH M. EESON Director - ----------------------------------------------------- Ralph M. Eeson /s/ JAMES R. GIBBS Director - ----------------------------------------------------- James R. Gibbs /s/ STEVEN J. GILBERT Director - ----------------------------------------------------- Steven J. Gilbert /s/ STEPHEN J. LUDLOW Director - ----------------------------------------------------- Stephen J. Ludlow /s/ BRIAN F. MACNEILL Director - ----------------------------------------------------- Brian F. MacNeill /s/ JAN RASK Director - ----------------------------------------------------- Jan Rask
39 42 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 3-A) -- Restated Certificate of Incorporation with amendments of Veritas DGC Inc. dated August 30, 1996. (Exhibit 3.1 to Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) 3-B) -- Certificate of Ownership and Merger of New Digicon Inc. and Digicon Inc. (Exhibit 3-B to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) 3-C) -- By-laws of New Digicon Inc. dated June 24, 1991. (Exhibit 3-C to Digicon Inc.'s Registration Statement No. 33-43873 dated November 12, 1991 is incorporated herein by reference.) *3-D) -- Certificate of Amendment to Restated Certificate of Incorporation of Veritas DGC Inc. dated September 30, 1999. 4-A) -- Specimen certificate for Senior Notes (Series A). (Included as part of Section 2.2 of Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-B) -- Form of Trust Indenture relating to the 9 3/4% Senior Notes due 2003 of Veritas DGC Inc. between Veritas DGC Inc. and Fleet National Bank, as trustee. (Exhibit 4-B to Veritas DGC Inc.'s Registration Statement No. 333-12481 dated September 20, 1996 is incorporated herein by reference.) 4-C) -- Specimen Veritas DGC Inc. Common Stock certificate. (Exhibit 4-C to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1996 is incorporated herein by reference.) 4-D) -- Rights Agreement between Veritas DGC Inc. and ChaseMellon Shareholder Services, L.L.C. dated as of May 15, 1997. (Exhibit 4.1 of Veritas DGC Inc.'s Current Report on Form 8-K filed May 27, 1997 is incorporated herein by reference.) 4-E) -- Form of Restricted Stock Grant Agreement. (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-48953 dated March 31, 1998 is incorporated herein by reference.) 4-F) -- Restricted Stock Plan as Amended and Restated September 14, 1999. (Exhibit 4.8 to Veritas DGC Inc.'s Registration Statement No. 333-87223 dated September 16, 1999 is incorporated herein by reference.) 4-G) -- Key Contributor Incentive Plan as Amended and Restated dated March 9, 1999. (Exhibit 4.9 to Veritas DGC Inc.'s Registration Statement No. 333-74305 dated March 12, 1999 is incorporated herein by reference.) 4-H) -- Specimen for Senior Notes (Series C). (Exhibit 4-K to Veritas DGC Inc.'s Form 10-Q for the quarter ended January 31, 1999 is incorporated herein by reference.) 4-I) -- Indenture relating to the 9 3/4% Senior Notes due 2003, Series B and Series C of Veritas DGC Inc. between Veritas DGC Inc. and State Street Bank and Trust Company dated October 28, 1998. (Exhibit 4.3 to Veritas DGC Inc.'s Current Report on Form 8-K dated November 12, 1998 is incorporated herein by reference.) 9-A) -- Voting and Exchange Trust Agreement dated August 30, 1996 among Digicon Inc., Veritas Energy Services Inc. and the R-M Trust Company. (Exhibit 9.1 of Veritas DGC Inc.'s Current Report on Form 8-K dated September 16, 1996 is incorporated herein by reference.) *9-B) -- Voting and Exchange Trust Agreement dated September 30, 1999 among Veritas DGC Inc., Veritas Energy Services Inc. and CIBC Mellon Trust Company.
43
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10-A) -- Support Agreement dated August 30, 1996 between Digicon Inc. and Veritas Energy Services Inc. (Exhibit 10.1 of Veritas DGC Inc.'s Current Report on Form 8-K dated August 30, 1996 is incorporated herein by reference.) 10-B) -- Second Amended and Restated 1992 Non-Employee Director Stock Option Plan. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) *10-C) -- Fifth Amended and Restated 1992 Employee Nonqualified Stock Option Plan. 10-D) -- 1997 Employee Stock Purchase Plan. (Exhibit 4.1 to Veritas DGC Inc.'s Registration Statement No. 333-38377 dated October 21, 1997 is incorporated herein by reference.) 10-E) -- Restricted Stock Agreement dated April 1, 1997 between Veritas DGC Inc. and Anthony Tripodo. (Exhibit 10-O to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-F) -- Employment Agreement executed by David B. Robson. (Exhibit 10-L to Veritas Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) 10-G) -- Employment Agreement executed by Stephen J. Ludlow. (Exhibit 10-B to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-H) -- Employment Agreement executed by Anthony Tripodo. (Exhibit 10-I to Veritas DGC Inc.'s Form 10-Q for the quarter ended April 30, 1997 is incorporated herein by reference.) 10-I) -- Employment Agreement executed by Rene M.J. VandenBrand. (Exhibit 10-N to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1997 is incorporated herein by reference.) *10-J -- Employment Agreement executed by Timothy L. Wells. 10-K) -- Credit Agreement dated July 27, 1998 among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein. (Exhibit 10-K to Veritas DGC Inc.'s Form 10-K for the year ended July 31, 1998 is incorporated herein by reference.) 10-L) -- First Amendment to Credit Agreement among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein dated October 23, 1998. (Exhibit 10-L to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) 10-M) -- Second Amendment to Credit Agreement among Veritas DGC Inc., as borrower, and Bank One, Texas, N.A., as issuing bank, as a bank and as agent for the banks, and the banks named therein dated November 20, 1998. (Exhibit 10-M to Veritas DGC Inc.'s Form 10-Q for the quarter ended October 31, 1998 is incorporated herein by reference.) *21) -- Subsidiaries of the Registrant. *23) -- Consent of PricewaterhouseCoopers LLP. *27) -- Financial Data Schedule for the year ended July 31, 1999. (Filed electronically herewith.)
- --------------- * Filed herewith EX-3.D 2 RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3-D CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF VERITAS DGC INC. Veritas DGC Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the board of directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Restated Certificate of Incorporation of the Corporation be amended as follows, Article IV, Section 3(c) shall be deleted. Article IV, Section 4 shall be and read in its entirety as follows: Section 4.A. VESI Special Voting Stock Designated. A series of previously outstanding Ordinary Shares, consisting of one such share, has been duly designated as "Special Voting Stock" (hereinafter referred to as the "VESI Special Voting Stock"). Each outstanding share of VESI Special Voting Stock shall be entitled at any relevant date to the number of votes determined in accordance with the "Plan of Arrangement" (as that term is defined in that certain "Combination Agreement" dated as of May 10, 1996 (hereinafter referred to as the "VESI Combination Agreement"), by and between Digicon Inc. and Veritas Energy Services Inc. ("VESI")) on all matters presented to the stockholders. No dividend or distribution of assets shall be paid to the holders of VESI Special Voting Stock. The VESI Special Voting Stock is not convertible into any other class or series of the capital stock of the Corporation or into cash, property or other rights, and may not be redeemed. Any shares of VESI Special Voting Stock purchased or otherwise acquired by the Corporation shall be deemed retired and shall be canceled and may not thereafter be reissued or otherwise disposed of by the Corporation. So long as any "VESI Exchangeable Shares" (i.e., "Exchangeable Shares," as that term is defined in the VESI Combination Agreement) shall be outstanding, the number of shares comprising the VESI Special Voting Stock shall not be increased or decreased and no other term of the VESI Special Voting Stock shall be amended, except upon the unanimous approval of all outstanding Ordinary Shares. Section 4.B. ERS Special Voting Stock Designated. A series of Ordinary Shares, consisting of one such share, is hereby designated as "ERS Special Voting Stock" (hereinafter referred to as "ERS Special Voting Stock"). Each outstanding share of ERS Special Voting Stock shall be entitled at any relevant date to the number of votes determined in accordance with the "Plan of Arrangement" (as that term is defined in that certain "Amended and Restated Combination Agreement" dated as of March 30, 1999 (hereinafter referred to as the "ERS Combination Agreement") by and between 1 2 Veritas DGC Inc. and Enertec Resource Services Inc. ("ERS")) on all matters presented to the stockholders. No dividend or distribution of assets shall be paid to the holders of ERS Special Voting Stock. The ERS Special Voting Stock is not convertible into any other class or series of the capital stock of the Corporation or into cash, property or other rights, and may not be redeemed. Any shares of ERS Special Voting Stock purchased or otherwise acquired by the Corporation shall be deemed retired and shall be canceled and may not thereafter be reissued or otherwise disposed of by the Corporation. So long as any "ERS Exchangeable Shares" (i.e., "Exchangeable Shares," as that term is defined in the ERS Combination Agreement) shall be outstanding, the number of shares comprising the ERS Special Voting Stock shall not be increased or decreased and no other term of the ERS Special Voting Stock shall be amended, except upon the unanimous approval of all outstanding Ordinary Shares. Section 4.C. Miscellaneous. Any reference herein to "Exchangeable Shares" encompasses both the VESI Exchangeable Shares and the ERS Exchangeable Shares. SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Larry L. Worden its Vice President, this 30th day of September, 1999. /s/ LARRY L. WORDEN ------------------------------- Larry L. Worden, Vice President 2 EX-9.B 3 VOTING AND EXCHANGE TRUST AGREEMENT 1 EXHIBIT 9-B VOTING AND EXCHANGE TRUST AGREEMENT MEMORANDUM OF AGREEMENT made as of the 30th day of September, 1999. B E T W E E N: VERITAS DGC INC., a corporation existing under the laws of the State of Delaware (hereinafter referred to as "Veritas") OF THE FIRST PART, - and - VERITAS ENERGY SERVICES INC., a corporation existing under the laws of the Province of Alberta (hereinafter referred to as "VESI") OF THE SECOND PART, - and - CIBC MELLON TRUST COMPANY, a trust company existing under the laws of Canada (hereinafter referred to as the "Trustee") OF THE THIRD PART. WHEREAS pursuant to a combination agreement dated as of March 30, 1999, by and among Veritas, VESI and Enertec Resource Services Inc. ("Enertec") (such agreement as it may be amended or restated is hereinafter referred to as the "Combination Agreement") the parties agreed that on the Effective Date (as defined in the Combination Agreement), Veritas and VESI would execute and deliver a Voting and Exchange Trust Agreement containing the terms and conditions set forth in Exhibit D to the Combination Agreement together with such other terms and conditions as may be agreed to by the parties to the Combination Agreement acting reasonably; AND WHEREAS pursuant to an arrangement (the "Arrangement") effected by Articles of Arrangement dated September 30, 1999 filed pursuant to the Business Corporations Act (Alberta), each issued and outstanding common share of Enertec (an "Enertec Common Share") was transferred to VESI in consideration for 0.345 issued and outstanding Class A Exchangeable Shares Series 1 of VESI (the "Series 1 Exchangeable Shares"); AND WHEREAS Appendix A of the above-mentioned Articles of Arrangement sets forth the rights, privileges, restrictions and conditions attaching to the Series 1 Exchangeable Shares (collectively, the "Exchangeable Share Provisions"), a copy of which is attached hereto as Schedule "A"; 2 - 2 - AND WHEREAS Veritas is to provide voting rights in Veritas to each holder (other than Veritas and its Subsidiaries) from time to time of Series 1 Exchangeable Shares, such voting rights per Series 1 Exchangeable Share to be equivalent to the voting rights per share of Veritas Common Stock (the "Veritas Common Stock"); AND WHEREAS Veritas is to grant to and in favour of the holders (other than Veritas and its Subsidiaries) from time to time of Series 1 Exchangeable Shares the right, in the circumstances set forth herein, to require Veritas to purchase from each such holder all or any part of the Series 1 Exchangeable Shares held by the holder; AND WHEREAS the parties desire to make appropriate provision and to establish a procedure whereby voting rights in Veritas shall be exercisable by holders (other than Veritas and its Subsidiaries) from time to time of Series 1 Exchangeable Shares by and through the Trustee, which will hold legal title to one share of Veritas ERS Special Voting Stock (the "Veritas ERS Special Voting Stock") to which voting rights attach for the benefit of such holders and whereby the rights to require Veritas to purchase Series 1 Exchangeable Shares from the holders thereof (other than Veritas and its Subsidiaries) shall be exercisable by such holders from time to time of Series 1 Exchangeable Shares by and through the Trustee, which will hold legal title to such rights for the benefit of such holders; AND WHEREAS these recitals and any statements of fact in this agreement are made by Veritas and VESI and not by the Trustee; NOW THEREFORE in consideration of the respective covenants and agreements provided in this agreement and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows: 1. DEFINITIONS AND INTERPRETATION (a) DEFINITIONS. In this agreement, the following terms shall have the following meanings: "Aggregate Equivalent Vote Amount" means, with respect to any matter, proposition or question on which holders of Veritas Common Stock are entitled to vote, consent or otherwise act, the product of (i) the number of shares of Series 1 Exchangeable Shares issued and outstanding and held by Holders multiplied by (ii) the Equivalent Vote Amount. "Applicable Laws" has the meaning set out in Section 5(j). "Arrangement" has the meaning set out in the recitals hereto. "Authorized Investments" means short term interest bearing or discount debt obligations issued or guaranteed by the Government of Canada or a Province of Canada or a Canadian chartered bank (which may include an affiliate or related party of the Trustee, including without limitation Mellon Bank Canada and Canadian Imperial Bank of Commerce) provided that each such obligation is rated at least RI (middle) by DBRS Inc. or an equivalent rating by Canadian Bond Rating Service. 3 - 3 - "Automatic Exchange Rights" means the benefit of the obligation of Veritas to effect the automatic exchange of shares of Veritas Common Stock for Series 1 Exchangeable Shares pursuant to Section 5(l) hereof. "Board of Directors" means the Board of Directors of VESI. "Business Day" has the meaning set out in the Exchangeable Share Provisions. "Combination Agreement" has the meaning set out in the recitals hereto. "Equivalent Vote Amount" means, with respect any matter, proposition or question on which holders of Veritas Common Stock are entitled to vote, consent or otherwise act, the number of votes to which a holder of one share of Veritas Common Stock is entitled with respect to such matter, proposition or question. "Exchange Right" has the meaning set out in Section 5(a)(i) hereof. "Exchangeable Share Provisions" has the meaning set out in the recitals hereto. "Holder Votes" has the meaning set out in Section 4(b) hereof. "Holders" means the registered holders from time to time of Series 1 Exchangeable Shares, other than Veritas and its Subsidiaries. "Indemnified Parties" has the meaning set out in Section 9(a) hereof. "Insolvency Event" means the institution by VESI of any proceeding to be adjudicated a bankrupt or insolvent or to be dissolved or wound-up, or the consent of VESI to the institution of bankruptcy, insolvency, dissolution or winding-up proceedings against it, or the filing of a petition, answer or consent seeking dissolution or winding-up under any bankruptcy, insolvency or analogous laws, including without limitation the Companies' Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the failure by VESI to contest in good faith any such proceedings commenced in respect of VESI within 15 days of becoming aware thereof, or the consent by VESI to the filing of any such petition or to the appointment of a receiver, or the making by VESI of a general assignment for the benefit of creditors, or the admission in writing by VESI of its inability to pay its debts generally as they become due, or VESI not being permitted, pursuant to liquidity or solvency requirements of applicable law, to redeem any Series 1 Exchangeable Shares in accordance with the terms thereof, to redeem any shares of any other series of Class A Exchangeable Shares of VESI in accordance with the terms thereof or to redeem any Exchangeable Shares of VESI in accordance with the terms thereof. "Liquidation Call Right" has the meaning set out in the Exchangeable Share Provisions. "Liquidation Event" has the meaning set out in Section 5(l)(ii) hereof. "Liquidation Event Effective Time" has the meaning set out in Section 5(l)(iii) hereof. 4 - 4 - "List" has the meaning set out in Section 4(f) hereof. "Officer's Certificate" means, with respect to Veritas or VESI, as the case may be, a certificate signed by any one of the Chairman of the Board, the Vice-Chairman of the Board, the President, any Vice-President or any other senior officer of Veritas or VESI, as the case may be. "Person" includes an individual, partnership, corporation, company, unincorporated syndicate or organization, trust, trustee, executor, administrator and other legal representative. "Redemption Call Right" has the meaning set out in the Exchangeable Share Provisions. "Retracted Shares" has the meaning set out in Section 5(g) hereof. "Retraction Call Right" has the meaning set out in the Exchangeable Share Provisions. "Series 1 Exchangeable Share Consideration" has the meaning set out in the Exchangeable Share Provisions. "Series 1 Exchangeable Share Price" has the meaning set out in the Exchangeable Share Provisions. "Series 1 Exchangeable Shares" has the meaning set out in the recitals hereto. "Subsidiary" has the meaning set out in the Exchangeable Share Provisions. "Support Agreement" means that certain support agreement made as of even date hereof between VESI and Veritas. "Trust" means the trust created by this agreement. "Trust Estate" means the Voting Share, any other securities, the Exchange Right, the Automatic Exchange Rights and any money or other property which may be held by the Trustee from time to time pursuant to this agreement. "Trustee" means CIBC Mellon Trust Company and, subject to the provisions of Article 10 hereof, includes any successor trustee or permitted assigns. "VESI Common Shares" means common shares in the capital stock of VESI. "Veritas Common Stock" has the meaning set out in the recitals hereto. "Veritas Consent" has the meaning set out in Section 4(b) hereof. "Veritas Meeting" has the meaning set out in Section 4(b) hereof. "Veritas Special ERS Voting Stock" has the meaning set out in the recitals hereto. "Veritas Successor" has the meaning set out in Section 11(a)(i) hereof. 5 - 5 - "Voting Rights" means the voting rights attached to the Voting Share. "Voting Share" means the one share of Veritas ERS Special Voting Stock, U.S. $0.01 par value, issued by Veritas to and deposited with the Trustee, which entitles the holder of record to a number of votes at meetings of holders of Veritas Common Stock equal to the Aggregate Equivalent Vote Amount. (b) INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this agreement into articles, sections and paragraphs and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this agreement. (c) NUMBER, GENDER, ETC. Words importing the singular number only shall include the plural and vice versa. Words importing the use of any gender shall include all genders. (d) DATE FOR ANY ACTION. If any date on which any action is required to be taken under this agreement is not a Business Day, such action shall be required to be taken on the next succeeding Business Day. 2. PURPOSE OF AGREEMENT The purpose of this agreement is to create the Trust for the benefit of the Holders, as herein provided. The Trustee will hold the Voting Share in order to enable the Trustee to exercise the Voting Rights and will hold the Exchange Right and the Automatic Exchange Rights in order to enable the Trustee to exercise such rights, in each case as trustee for and on behalf of the Holders as provided in this agreement. 3. VOTING SHARE (a) ISSUANCE AND OWNERSHIP OF THE VOTING SHARE. Veritas hereby issues to and deposits with the Trustee the Voting Share to be hereafter held of record by the Trustee as trustee for and on behalf of, and for the use and benefit of, the Holders and in accordance with the provisions of this agreement. Veritas hereby acknowledges receipt from the Trustee as trustee for and on behalf of the Holders of good and valuable consideration (and the adequacy thereof) for the issuance of the Voting Share by Veritas to the Trustee. During the term of the Trust and subject to the terms and conditions of this agreement, the Trustee shall possess and be vested with full legal ownership of the Voting Share and shall be entitled to exercise all of the rights and powers of an owner with respect to the Voting Share, provided that the Trustee shall: (i) hold the Voting Share and the legal title thereto as trustee solely for the use and benefit of the Holders in accordance with the provisions of this agreement; and 6 - 6 - (ii) except as specifically authorized by this agreement, have no power or authority to sell, transfer, vote or otherwise deal in or with the Voting Share and the Voting Share shall not be used or disposed of by the Trustee for any purpose other than the purposes for which this Trust is created pursuant to this agreement. (b) LEGENDED SHARE CERTIFICATES. VESI will cause each certificate representing Series 1 Exchangeable Shares to bear an appropriate legend notifying the Holders of their right to instruct the Trustee with respect to the exercise of the Voting Rights with respect to the Series 1 Exchangeable Shares held by a Holder. (c) SAFE KEEPING OF CERTIFICATE. The certificate representing the Voting Share shall at all times be held in safe keeping by the Trustee or its agent. 4. EXERCISE OF VOTING RIGHTS (a) VOTING RIGHTS. The Trustee, as the holder of record of the Voting Share, shall be entitled to all of the Voting Rights, including the right to consent to or to vote in person or by proxy the Voting Share, on any matter, question or proposition whatsoever that may properly come before the stockholders of Veritas at a Veritas Meeting or in connection with a Veritas Consent (in each case, as hereinafter defined). The Voting Rights shall be and remain vested in and exercised by the Trustee. Subject to Section 7(o) hereof, the Trustee shall exercise the Voting Rights only on the basis of instructions received pursuant to this Article 4 from Holders entitled to instruct the Trustee as to the voting thereof at the time at which a Veritas Consent is sought or a Veritas Meeting is held. To the extent that no instructions are received from a Holder with respect to the Voting Rights to which such Holder is entitled, the Trustee shall not exercise or permit the exercise of such Holder's Voting Rights. (b) NUMBER OF VOTES. With respect to all meetings of stockholders of Veritas at which holders of shares of Veritas Common Stock are entitled to vote (a "Veritas Meeting") and with respect to all written consents sought by Veritas from its stockholders including the holders of shares of Veritas Common Stock (a "Veritas Consent"), each Holder shall be entitled to instruct the Trustee to cast and exercise, in the manner instructed, a number of votes equal to the Equivalent Vote Amount for each Series 1 Exchangeable Share owned of record by such Holder on the record date established by Veritas or by applicable law for such Veritas Meeting or Veritas Consent, as the case may be (the "Holder Votes") in respect of each matter, question or proposition to be voted on at such Veritas Meeting or to be consented to in connection with such Veritas Consent. (c) MAILINGS TO SHAREHOLDERS. With respect to each Veritas Meeting and Veritas Consent, the Trustee will mail or cause to be mailed (or otherwise communicate in the same manner as Veritas utilizes in communications to holders of Veritas Common Stock, subject to the Trustee's ability to provide this method of communication and upon being advised in writing of such method) to each of the 7 - 7 - Holders named in the List on the same day as the initial mailing or notice (or other communication) with respect thereto is given by Veritas to its stockholders: (i) a copy of such notice, together with any proxy or information statement and related materials to be provided to stockholders of Veritas; (ii) a statement that such Holder is entitled to instruct the Trustee as to the exercise of the Holder Votes with respect to such Veritas Meeting or Veritas Consent, as the case may be, or, pursuant to Section 4(g) hereof, to attend such Veritas Meeting and to exercise personally as the proxy of the Trustee, the Holder Votes thereat; (iii) a statement as to the manner in which such instructions may be given to the Trustee, including an express indication that instructions may be given to the Trustee to give: (A) a proxy to such Holder or his designee to exercise personally the Holder Votes; or (B) a proxy to a designated agent or other representative of the management of Veritas to exercise such Holder Votes; (iv) a statement that if no such instructions are received from the Holder, the Holder Votes to which such Holder is entitled will not be exercised; (v) a form of direction whereby the Holder may so direct and instruct the Trustee as contemplated herein; and (vi) a statement of (A) the time and date by which such instructions must be received by the Trustee in order to be binding upon it, which in the case of a Veritas Meeting shall not be earlier than the close of business on the Business Day prior to such meeting, and (B) the method for revoking or amending such instructions. The materials referred to above are to be provided by Veritas to the Trustee, but shall be subject to review and comment by the Trustee. For the purpose of determining Holder Votes to which a Holder is entitled in respect of any such Veritas Meeting or Veritas Consent, the number of Series 1 Exchangeable Shares owned of record by the Holder shall be determined at the close of business on the record date established by Veritas or by applicable law for purposes of determining stockholders entitled to vote at such Veritas Meeting or to give written consent in connection with such Veritas Consent. Veritas will notify the Trustee in writing of any decision of the board of directors of Veritas with respect to the calling of any such Veritas Meeting or the seeking of any such Veritas Consent and shall provide all necessary information and materials to the Trustee in each case 8 - 8 - promptly and in any event in sufficient time to enable the Trustee to perform its obligations contemplated by this Section 4(c). (d) COPIES OF STOCKHOLDER INFORMATION. Veritas will deliver to the Trustee copies of all proxy materials, (including notices of Veritas Meetings but excluding proxies to vote shares of Veritas Common Stock), information statements, reports (including without limitation all interim and annual financial statements) and other written communications that are to be distributed from time to time to holders of Veritas Common Stock in sufficient quantities and in sufficient time so as to enable the Trustee to send those materials to each Holder at the same time as such materials are first sent to holders of Veritas Common Stock. The Trustee will mail or otherwise send to each Holder, at the expense of Veritas, copies of all such materials (and all materials specifically directed to the Holders or to the Trustee for the benefit of the Holders by Veritas) received by the Trustee from Veritas at the same time as such materials are first sent to holders of Veritas Common Stock. The Trustee will make copies of all such materials available for inspection by any Holder at the Trustee's principal office in the cities of Calgary and Toronto. (e) OTHER MATERIALS. Immediately after receipt by Veritas or any stockholder of Veritas of any material sent or given generally to the holders of Veritas Common Stock by or on behalf of a third party, including without limitation dissident proxy and information circulars (and related information and material) and tender and exchange offer circulars (and related information and material), Veritas shall use its best efforts to obtain and deliver to the Trustee copies thereof in sufficient quantities so as to enable the Trustee to forward such material (unless the same has been provided directly to Holders by such third party) to each Holder as soon as possible thereafter. As soon as practicable after receipt thereof, the Trustee will mail or otherwise send to each Holder, at the expense of Veritas, copies of all such materials received by the Trustee from Veritas. The Trustee will also make copies of all such materials available for inspection by any Holder at the Trustee's principal office in the cities of Toronto and Calgary. (f) LIST OF PERSONS ENTITLED TO VOTE. VESI shall, (i) prior to each annual, general and special Veritas Meeting or the seeking of any Veritas Consent and (ii) forthwith upon each request made at any time by the Trustee in writing, prepare or cause to be prepared a list (a "List") of the names and addresses of the Holders arranged in alphabetical order and showing the number of Series 1 Exchangeable Shares held of record by each such Holder, in each case at the close of business on the date specified by the Trustee in such request or, in the case of a List prepared in connection with a Veritas Meeting or a Veritas Consent, at the close of business on the record date established by Veritas or pursuant to applicable law for determining the holders of Veritas Common Stock entitled to receive notice of and/or to vote at such Veritas Meeting or to give consent in connection with such Veritas Consent. Each such List shall be delivered to the Trustee promptly after receipt by VESI of such request or the record date for such meeting or seeking of consent, as the case may be, and in any event within sufficient time as to enable the Trustee to perform its obligations under this agreement. Veritas agrees to give VESI written notice (with 9 - 9 - a copy to the Trustee) of the calling of any Veritas Meeting or the seeking of any Veritas Consent, together with the record dates therefor, sufficiently prior to the date of the calling of such meeting or seeking of such consent so as to enable VESI to perform its obligations under this Section 4(f). (g) ENTITLEMENT TO DIRECT VOTES. Any Holder named in a List prepared in connection with any Veritas Meeting or any Veritas Consent will be entitled (i) to instruct the Trustee in the manner described in Section 4(c) hereof with respect to the exercise of the Holder Votes to which such Holder is entitled or (ii) to attend such meeting and personally to exercise thereat (or to exercise with respect to any written consent), as the proxy of the Trustee, the Holder Votes to which such Holder is entitled. (h) VOTING BY TRUSTEE, AND ATTENDANCE OF TRUSTEE REPRESENTATIVE, AT MEETING. (i) In connection with each Veritas Meeting and Veritas Consent, the Trustee shall exercise, either in person or by proxy, in accordance with the instructions received from a Holder pursuant to Section 4(c) hereof, the Holder Votes as to which such Holder is entitled to direct the vote (or any lesser number thereof as may be set forth in the instructions); provided, however, that such written instructions are received by the Trustee from the Holder prior to the time and date fixed by it for receipt of such instructions in the notice given by the Trustee to the Holder pursuant to Section 4(c) hereof. (ii) The Trustee shall cause such representatives as are empowered by it to sign and deliver, on behalf of the Trustee, proxies for Voting Rights to attend each Veritas Meeting. Upon submission by a Holder (or its designee) of identification satisfactory to the Trustee's representatives, and at the Holder's request, such representatives shall sign and deliver to such Holder (or its designee) a proxy to exercise personally the Holder Votes as to which such Holder is otherwise entitled hereunder to direct the vote, if such Holder either (A) has not previously given the Trustee instructions pursuant to Section 4(c) hereof in respect of such meeting, or (B) submits to the Trustee's representatives written revocation of any such previous instructions. At such meeting, the Holder exercising such Holder Votes shall have the same rights as the Trustee to speak at the meeting in respect of any matter, question or proposition, to vote by way of ballot at the meeting in respect of any matter, question or proposition and to vote at such meeting by way of a show of hands in respect of any matter, question or proposition. (i) DISTRIBUTION OF WRITTEN MATERIALS. Any written materials to be distributed by the Trustee to the Holders pursuant to this agreement shall be delivered or sent by mail (or otherwise communicated in the same manner as Veritas utilizes in communications to holders of Veritas Common Stock, subject to the Trustee's ability to provide this method of communication and upon being advised in writing 10 - 10 - of such method) to each Holder at its address as shown on the books of VESI. VESI shall provide, or cause to be provided to the Trustee for this purpose, on a timely basis and without charge or other expense: (A) a current List; and (B) upon the request of the Trustee, mailing labels to enable the Trustee to carry out its duties under this agreement. The materials referred to above are to be provided by Veritas to the Trustee, but shall be subject to review and comment by the Trustee. (j) TERMINATION OF VOTING RIGHTS. Except as otherwise provided herein or in the Exchangeable Share Provisions, all of the rights of a Holder with respect to the Holder Votes exercisable in respect of the Series 1 Exchangeable Shares held by such Holder, including the right to instruct the Trustee as to the voting of or to vote personally such Holder Votes, shall be deemed to be surrendered by the Holder to Veritas and such Holder Votes and the Voting Rights represented thereby shall cease immediately upon the delivery by such Holder to the Trustee of the certificates representing such Series 1 Exchangeable Shares in connection with the exercise by the Holder of the Exchange Right or the occurrence of the automatic exchange of Series 1 Exchangeable Shares for shares of Veritas Common Stock, as specified in Article 5 hereof (unless in either case Veritas shall not have delivered the Series 1 Exchangeable Share Consideration deliverable in exchange therefor to the Trustee for delivery to the Holders), or upon the redemption of Series 1 Exchangeable Shares pursuant to Article 6 or Article 7 of the Exchangeable Share Provisions, or upon the effective date of the liquidation, dissolution or winding-up of VESI pursuant to Article 5 of the Exchangeable Share Provisions, or upon the purchase of Series 1 Exchangeable Shares from the holder thereof by Veritas pursuant to the exercise by Veritas of the Retraction Call Right, the Redemption Call Right or the Liquidation Call Right. 5. EXCHANGE RIGHT AND AUTOMATIC EXCHANGE (a) GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. Veritas hereby grants to the Trustee as trustee for and on behalf of, and for the use and benefit of, the Holders (i) the right (the "Exchange Right"), upon the occurrence and during the continuance of an Insolvency Event, to require Veritas to purchase from each or any Holder all or any part of the Series 1 Exchangeable Shares held by the Holders, and (ii) the Automatic Exchange Rights, all in accordance with the provisions of this agreement. Veritas hereby acknowledges receipt from the Trustee as trustee for and on behalf of the Holders of good and valuable consideration (and the adequacy thereof) for the grant of the Exchange Right and the Automatic Exchange Rights by Veritas to the Trustee. During the term of the Trust and subject to the terms and conditions of this agreement, the Trustee shall possess and be vested with full legal ownership of the Exchange Right and the Automatic Exchange Rights and shall be 11 - 11 - entitled to exercise all of the rights and powers of an owner with respect to the Exchange Right and the Automatic Exchange Rights, provided that the Trustee shall: (iii) hold the Exchange Right and the Automatic Exchange Rights and the legal title thereto as trustee solely for the use and benefit of the Holders in accordance with the provisions of this agreement; and (iv) except as specifically authorized by this agreement, have no power or authority to exercise or otherwise deal in or with the Exchange Right or the Automatic Exchange Rights, and the Trustee shall not exercise any such rights for any purpose other than the purposes for which this Trust is created pursuant to this agreement. (b) LEGENDED SHARE CERTIFICATES. VESI will cause each certificate representing Series 1 Exchangeable Shares to bear an appropriate legend notifying the Holders of: (i) their right to instruct the Trustee with respect to the exercise of the Exchange Right in respect of the Series 1 Exchangeable Shares held by a Holder; and (ii) the Automatic Exchange Rights. (c) GENERAL EXERCISE OF EXCHANGE RIGHT. The Exchange Right shall be and remain vested in and exercised by the Trustee. Subject to Section 7(o) hereof, the Trustee shall exercise the Exchange Right only on the basis of instructions received pursuant to this Article 5 from Holders entitled to instruct the Trustee as to the exercise thereof. To the extent that no instructions are received from a Holder with respect to the Exchange Right, the Trustee shall not exercise or permit the exercise of the Exchange Right. (d) PURCHASE PRICE. The purchase price payable by Veritas for each Series 1 Exchangeable Share to be purchased by Veritas under the Exchange Right shall be an amount equal to the Series 1 Exchangeable Share Price on the last Business Day prior to the day of closing of the purchase and sale of such Series 1 Exchangeable Share under the Exchange Right. In connection with each exercise of the Exchange Right, Veritas will provide to the Trustee an Officer's Certificate setting forth the calculation of the Series 1 Exchangeable Share Price for each Series 1 Exchangeable Share. The Series 1 Exchangeable Share Price for each such Series 1 Exchangeable Share so purchased may be satisfied only by Veritas issuing and delivering or causing to be delivered to the Trustee, on behalf of the relevant Holder, the Series 1 Exchangeable Share Consideration representing the total Series 1 Exchangeable Share Price. (e) EXERCISE INSTRUCTIONS. Subject to the terms and conditions herein set forth, a Holder shall be entitled, upon the occurrence and during the continuance of an Insolvency Event, to instruct the Trustee to exercise the Exchange Right with respect to all or any part of the Series 1 Exchangeable Shares registered in the name of such Holder on the books of VESI. To cause the exercise of the Exchange Right by the 12 - 12 - Trustee, the Holder shall deliver to the Trustee, in person or by certified or registered mail, at its principal office in Calgary, Alberta, Toronto, Ontario or at such other places in Canada as the Trustee may from time to time designate by written notice to the Holders, the certificates representing the Series 1 Exchangeable Shares which such Holder desires Veritas to purchase, duly endorsed in blank, and accompanied by such other documents and instruments as may be required to effect a transfer of Series 1 Exchangeable Shares under the Business Corporations Act (Alberta), other applicable laws, if any, and the by-laws of VESI and such additional documents and instruments as the Trustee, VESI and Veritas may reasonably require together with (i) a duly completed form of notice of exercise of the Exchange Right, contained on the reverse of or attached to the Series 1 Exchangeable Share certificates, stating (A) that the Holder thereby instructs the Trustee to exercise the Exchange Right so as to require Veritas to purchase from the Holder the number of Series 1 Exchangeable Shares specified therein, (B) that such Holder has good title to and owns all such Series 1 Exchangeable Shares to be acquired by Veritas free and clear of all liens, claims and encumbrances, (C) the names in which the certificates representing Veritas Common Stock issuable in connection with the exercise of the Exchange Right are to be issued and (D) the names and addresses of the persons to whom the Series 1 Exchangeable Share Consideration should be delivered and (ii) payment (or evidence satisfactory to the Trustee, VESI and Veritas of payment) of the taxes (if any) payable as contemplated by Section 5(h) of this agreement. If only a part of the Series 1 Exchangeable Shares represented by any certificate or certificates delivered to the Trustee are to be purchased by Veritas under the Exchange Right, a new certificate for the balance of such Series 1 Exchangeable Shares shall be issued to the Holder at the expense of VESI. (f) DELIVERY OF SERIES 1 EXCHANGEABLE SHARE CONSIDERATION; EFFECT OF EXERCISE. Promptly after receipt of the certificates representing the Series 1 Exchangeable Shares which the Holder desires Veritas to purchase under the Exchange Right (together with such documents and instruments of transfer and a duly completed form of notice of exercise of the Exchange Right), duly endorsed for transfer to Veritas, the Trustee shall notify Veritas and VESI of its receipt of the same, which notice to Veritas and VESI shall constitute exercise of the Exchange Right by the Trustee on behalf of the Holder of such Series 1 Exchangeable Shares, and Veritas shall immediately thereafter deliver or cause to be delivered to the Trustee, for delivery to the Holder of such Series 1 Exchangeable Shares (or to such other persons, if any, properly designated by such Holder), the Series 1 Exchangeable Share Consideration, deliverable in connection with the exercise of the Exchange Right; provided, however, that no such delivery shall be made unless and until the Holder requesting the same shall have paid (or provided evidence satisfactory to the Trustee, VESI and Veritas of the payment of) the taxes (if any) payable as contemplated by Section 5(h) of this agreement. In connection with payment of the Series 1 Exchangeable Share Consideration, Veritas shall be entitled to liquidate some of the Veritas Common Stock that would otherwise be deliverable to the particular holder of Series 1 Exchangeable Shares in order to fund any statutory withholding tax obligation. Immediately upon the giving of notice by the Trustee to Veritas and VESI of the exercise of the Exchange Right, as provided in this Section 13 - 13 - 5(f), the closing of the transaction of purchase and sale contemplated by the Exchange Right shall be deemed to have occurred, and the Holder of such Series 1 Exchangeable Shares shall be deemed to have transferred to Veritas all of its right, title and interest in and to such Series 1 Exchangeable Shares and in the related interest in the Trust Estate and shall cease to be a holder of such Series 1 Exchangeable Shares and shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive his proportionate part of the total purchase price therefor, unless such Series 1 Exchangeable Share Consideration is not delivered by Veritas to the Trustee, for delivery to such Holder (or to such other persons, if any, properly designated by such Holder), within five Business Days of the date of the giving of such notice by the Trustee, in which case the rights of the Holder shall remain unaffected until such Series 1 Exchangeable Share Consideration is delivered by Veritas and any cheque included therein is paid. Concurrently with such Holder ceasing to be a holder of Series 1 Exchangeable Shares, the Holder shall be considered and deemed for all purposes to be the holder of the shares of Veritas Common Stock delivered to it pursuant to the Exchange Right. Notwithstanding the foregoing until the Series 1 Exchangeable Share Consideration is delivered to the Holder, the Holder shall be deemed to still be a holder of the sold Series 1 Exchangeable Shares for purposes of voting rights with respect thereto under this agreement. (g) EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the event that a Holder has exercised its right under Article 6 of the Exchangeable Share Provisions to require VESI to redeem any or all of the Series 1 Exchangeable Shares held by the Holder (the "Retracted Shares") and is notified by VESI pursuant to Section 6.6 of the Exchangeable Share Provisions that VESI will not be permitted as a result of liquidity or solvency requirements of applicable law to redeem all such Retracted Shares, subject to receipt by the Trustee of written notice to that effect from VESI and provided that Veritas shall not have exercised the Retraction Call Right with respect to the Retracted Shares and that the Holder has not revoked the retraction request delivered by the Holder to VESI pursuant to Section 6.1 of the Exchangeable Share Provisions, the retraction request will constitute and will be deemed to constitute notice from the Holder to the Trustee instructing the Trustee to exercise the Exchange Right with respect to those Retracted Shares which VESI is unable to redeem. In any such event, VESI hereby agrees with the Trustee and in favour of the Holder immediately to notify the Trustee of such prohibition against VESI redeeming all of the Retracted Shares and immediately to forward or cause to be forwarded to the Trustee all relevant materials delivered by the Holder to VESI or to the transfer agent of the Series 1 Exchangeable Shares (including without limitation a copy of the retraction request delivered pursuant to Section 6.1 of the Exchangeable Share Provisions) in connection with such proposed redemption of the Retracted Shares and the Trustee will thereupon exercise the Exchange Right with respect to the Retracted Shares that VESI is not permitted to redeem and will require Veritas to purchase such shares in accordance with the provisions of this Article 5. 14 - 14 - (h) STAMP OR OTHER TRANSFER TAXES. Upon any sale of Series 1 Exchangeable Shares to Veritas pursuant to the Exchange Right or the Automatic Exchange Rights, the share certificate or certificates representing Veritas Common Stock to be delivered in connection with the payment of the total purchase price therefor shall be issued in the name of the Holder of the Series 1 Exchangeable Shares so sold or in such names as such Holder may otherwise direct in writing without charge to the holder of the Series 1 Exchangeable Shares so sold, provided, however, that such Holder (i) shall pay (and neither Veritas, VESI nor the Trustee shall be required to pay) any documentary, stamp, transfer or other similar taxes that may be payable in respect of any transfer involved in the issuance or delivery of such shares to a person other than such Holder or (ii) shall have established to the satisfaction of the Trustee, Veritas and VESI that such taxes, if any, have been paid. (i) NOTICE OF INSOLVENCY EVENT. Immediately upon the occurrence of an Insolvency Event or any event which with the giving of notice or the passage of time or both would be an Insolvency Event, VESI and Veritas shall give written notice thereof to the Trustee. As soon as practicable after receiving notice from VESI and Veritas or from any other Person of the occurrence of an Insolvency Event, the Trustee will mail to each Holder, at the expense of Veritas, a notice of such Insolvency Event in the form provided by Veritas, which notice shall contain a brief statement of the right of the Holders with respect to the Exchange Right. (j) QUALIFICATION OF VERITAS COMMON STOCK. Veritas covenants that if any shares of Veritas Common Stock to be issued and delivered pursuant to the Exchange Right or the Automatic Exchange Rights require registration or qualification with or approval of or the filing of any document including any prospectus or similar document or the taking of any proceeding with or the obtaining of any order, ruling or consent from any governmental or regulatory authority under any Canadian or United States federal, provincial or state law or regulation or pursuant to the rules and regulations of any regulatory authority or the fulfillment of any other legal requirement (collectively, the "Applicable Laws") before such shares may be issued and delivered by Veritas to the initial holder thereof (other than VESI) or in order that such shares may be freely traded thereafter (other than any restrictions on transfer by reason of a holder being a "control person" of Veritas for purposes of Canadian federal or provincial securities law or an "affiliate" of Veritas or, prior to the Effective Date, of Enertec for purposes of United States federal or state securities law), Veritas will in good faith expeditiously take all such actions and do all such things as are necessary to cause such shares of Veritas Common Stock to be and remain duly registered, qualified or approved. Veritas represents and warrants that it has in good faith taken all actions and done all things as are necessary under Applicable Laws as they exist on the date hereof to cause the shares of Veritas Common Stock to be issued and delivered pursuant to the Exchange Right and the Automatic Exchange Rights and to be freely tradeable thereafter (other than restrictions on transfer by reason of a holder being a "control person" of Veritas for the purposes of Canadian federal and provincial securities law or an "affiliate" of Veritas or, prior to the Effective Date, of Enertec for the purposes of United States federal or state securities law). Veritas will in good faith expeditiously take all such 15 - 15 - actions and do all such things as are necessary to cause all shares of Veritas Common Stock to be delivered pursuant to the Exchange Right or the Automatic Exchange Rights to be and to continue to be listed, quoted or posted for trading on all stock exchanges and quotation systems on which such shares are listed, quoted or posted for trading at such time. (k) RESERVATION OF SHARES OF VERITAS COMMON STOCK. Veritas hereby represents, warrants and covenants that it has irrevocably reserved for issuance and will at all times keep available, free from pre-emptive and other rights, out of its authorized and unissued capital stock such number of shares of Veritas Common Stock (i) as is equal to the sum of (A) the number of Series 1 Exchangeable Shares issued and outstanding from time to time and (B) the number of Series 1 Exchangeable Shares issuable upon the exercise of all rights to acquire Series 1 Exchangeable Shares outstanding from time to time and (ii) as are now and may hereafter be required to enable and permit Veritas and VESI to meet their respective obligations hereunder, under the Restated Certificate of Incorporation of Veritas, under the Support Agreement, under the Exchangeable Share Provisions and under any other security or commitment pursuant to the Arrangement with respect to which Veritas may now or hereafter be required to issue shares of Veritas Common Stock. (l) AUTOMATIC EXCHANGE ON LIQUIDATION OF VERITAS. (i) Veritas will give the Trustee written notice of each of the following events at the time set forth below: (A) in the event of any determination by the board of directors of the Veritas to institute voluntary liquidation, dissolution or winding-up proceedings with respect to Veritas or to effect any other distribution of assets of Veritas among its stockholders for the purpose of winding-up its affairs, at least 60 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; and (B) immediately, upon the earlier of (I) receipt by Veritas of notice of, and (II) Veritas otherwise becoming aware of, any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of Veritas or to effect any other distribution of assets of Veritas among its stockholders for the purpose of winding-up its affairs. (ii) Immediately following receipt by the Trustee from Veritas of notice of any event (a "Liquidation Event") contemplated by Section 5(l)(i) above, the Trustee will give notice thereof to the Holders. Such notice will be provided by Veritas to the Trustee and shall include a brief description of the automatic exchange of Series 1 Exchangeable Shares for shares of Veritas Common Stock provided for in Section 5(l)(iii) below. 16 - 16 - (iii) In order that the Holders will be able to participate on a PRO RATA basis with the holders of Veritas Common Stock in the distribution of assets of Veritas in connection with a Liquidation Event, immediately prior to the effective time (the "Liquidation Event Effective Time") of a Liquidation Event all of the then outstanding Series 1 Exchangeable Shares shall be automatically exchanged for shares of Veritas Common Stock. To effect such automatic exchange, Veritas shall be deemed to have purchased each Series 1 Exchangeable Share outstanding immediately prior to the Liquidation Event Effective Time and held by Holders, and each Holder shall be deemed to have sold the Series 1 Exchangeable Shares held by it at such time, for a purchase price per share equal to the Series 1 Exchangeable Share Price applicable at such time. In connection with such automatic exchange, Veritas will provide to the Trustee an Officer's Certificate setting forth the calculation of the purchase price for each Series 1 Exchangeable Share. (iv) The closing of the transaction of purchase and sale contemplated by Section 5(l)(iii) above shall be deemed to have occurred immediately prior to the Liquidation Event Effective Time, and each Holder of Series 1 Exchangeable Shares shall be deemed to have transferred to Veritas all of the Holder's right, title and interest in and to such Series 1 Exchangeable Shares and the related interest in the Trust Estate and shall cease to be a holder of such Series 1 Exchangeable Shares and Veritas shall deliver to the Holder the Series 1 Exchangeable Share Consideration deliverable upon the automatic exchange of Series 1 Exchangeable Shares. In connection with payment of the Series 1 Exchangeable Share Consideration, Veritas shall be entitled to liquidate some of the Veritas Common Stock that would otherwise be deliverable to the particular holder of Series 1 Exchangeable Shares in order to fund any statutory withholding tax obligation. Concurrently with such Holder ceasing to be a holder of Series 1 Exchangeable Shares, the Holder shall be considered and deemed for all purposes to be the holder of the shares of Veritas Common Stock issued to it pursuant to the automatic exchange of Series 1 Exchangeable Shares for Veritas Common Stock and the certificates held by the Holder previously representing the Series 1 Exchangeable Shares exchanged by the Holder with Veritas pursuant to such automatic exchange shall thereafter be deemed to represent the shares of Veritas Common Stock issued to the Holder by Veritas pursuant to such automatic exchange. Upon the request of a Holder and the surrender by the Holder of Series 1 Exchangeable Share certificates deemed to represent shares of Veritas Common Stock, duly endorsed in blank and accompanied by such instruments of transfer as Veritas may reasonably require, Veritas shall deliver or cause to be delivered to the Holder certificates representing the shares of Veritas Common Stock of which the Holder is the holder. Notwithstanding the foregoing until each Holder is actually entered on the register of holders of Veritas Common Stock, such Holder shall be deemed to still be a holder of the transferred Series 1 Exchangeable Shares for purposes of all voting rights with respect thereto under this agreement. 17 - 17 - 6. RESTRICTIONS ON ISSUANCE OF VERITAS ERS SPECIAL VOTING STOCK During the term of this agreement, Veritas will not issue any shares of Veritas ERS Special Voting Stock in addition to the Voting Share. 7. CONCERNING THE TRUSTEE (a) POWERS AND DUTIES OF THE TRUSTEE. The rights, powers and authorities of the Trustee under this agreement, in its capacity as trustee of the Trust, shall include: (i) receipt and deposit of the Voting Share from Veritas as trustee for and on behalf of the Holders in accordance with the provisions of this agreement; (ii) granting proxies and distributing materials to Holders as provided in this agreement; (iii) voting the Holder Votes in accordance with the provisions of this agreement; (iv) receiving the grant of the Exchange Right and the Automatic Exchange Rights from Veritas as trustee for and on behalf of the Holders in accordance with the provisions of this agreement; (v) exercising the Exchange Right and enforcing the benefit of the Automatic Exchange Rights, in each case in accordance with the provisions of this agreement, and in connection therewith receiving from Holders Series 1 Exchangeable Shares and other requisite documents and distributing to such Holders the shares of Veritas Common Stock and cheques and property, if any, to which such Holders are entitled upon the exercise of the Exchange Right or pursuant to the Automatic Exchange Rights, as the case may be; (vi) holding title to the Trust Estate; (vii) investing any moneys forming, from time to time, a part of the Trust Estate as provided in this agreement; (viii) taking action at the direction of a Holder or Holders to enforce the obligations of Veritas under this agreement; and (ix) taking such other actions and doing such other things as are specifically provided in this agreement. In the exercise of such rights, powers and authorities the Trustee shall have (and is granted) such incidental and additional rights, powers and authority not in conflict with any of the provisions of this agreement as the Trustee, acting in good faith and in the reasonable exercise of its discretion, may deem necessary, appropriate or desirable to effect the purpose of the Trust. Any exercise of such discretionary rights, 18 - 18 - powers and authorities by the Trustee shall be final, conclusive and binding upon all persons. For greater certainty, the Trustee shall have only those duties as are set out specifically in this agreement. The Trustee in exercising its rights, powers, duties and authorities hereunder shall act honestly and in good faith with a view to the best interests of the Holders and shall exercise the care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. The Trustee shall not be bound to give any notice or do or take any act, action or proceeding by virtue of the powers conferred on it hereby unless and until it shall be specifically required to do so under the terms hereof; nor shall the Trustee be required to take any notice of, or to do or to take any act, action or proceeding as a result of any default or breach of any provision hereunder, unless and until notified in writing of such default or breach, which notices shall distinctly specify the default or breach desired to be brought to the attention of the Trustee and in the absence of such notice the Trustee may for all purposes of this agreement conclusively assume that no default or breach has been made in the observance or performance of any of the representations, warranties, covenants, agreements or conditions contained herein. (b) NO CONFLICT OF INTEREST. The Trustee represents to VESI and Veritas that at the date of execution and delivery of this agreement there exists no material conflict of interest in the role of the Trustee as a fiduciary hereunder and the role of the Trustee in any other capacity. The Trustee shall, within 90 days after it becomes aware that such a material conflict of interest exists, either eliminate such material conflict of interest or resign in the manner and with the effect specified in Article 10 hereof. If, notwithstanding the foregoing provisions of this Section 7(b), the Trustee has such a material conflict of interest, the validity and enforceability of this agreement shall not be affected in any manner whatsoever by reason only of the existence of such material conflict of interest. If the Trustee contravenes the foregoing provisions of this Section 7(b), any interested party may apply to the Alberta Court of Queen's Bench an order that the Trustee be replaced as trustee hereunder. (c) DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC. VESI and Veritas irrevocably authorize the Trustee, from time to time, to: (i) consult, communicate and otherwise deal with the respective registrars and transfer agents, and with any such subsequent registrar or transfer agent, of the Series 1 Exchangeable Shares and Veritas Common Stock; and (ii) requisition, from time to time, (A) from any such registrar or transfer agent any information readily available from the records maintained by it which the Trustee may reasonably require for the discharge of its duties and responsibilities under this agreement and (B) from the transfer agent of Veritas Common Stock, and any subsequent transfer agent of such shares, the share certificates issuable upon the exercise from time to time of the 19 - 19 - Exchange Right and pursuant to the Automatic Exchange Rights in the manner specified in Article 5 hereof. VESI and Veritas irrevocably authorize their respective registrars and transfer agents to comply with all such requests. Veritas covenants that it will supply its transfer agent with duly executed share certificates for the purpose of completing the exercise from time to time of the Exchange Right and the Automatic Exchange Rights, in each case pursuant to Article 5 hereof. (d) BOOKS AND RECORDS. The Trustee shall keep available for inspection by Veritas and VESI, at the Trustee's principal office in Calgary, Alberta, correct and complete books and records of account relating to the Trustee's actions under this agreement, including without limitation all information relating to mailings and instructions to and from Holders and all transactions pursuant to the Voting Rights, the Exchange Right and the Automatic Exchange Rights for the term of this agreement. On or before June 30, 2000, and on or before June 30 in every year thereafter, so long as the Voting Share is on deposit with the Trustee, the Trustee shall transmit to Veritas and VESI a brief report, dated as of the preceding March 31, with respect to: (i) the property and funds comprising the Trust Estate as of that date; (ii) the number of exercises of the Exchange Right, if any, and the aggregate number of Series 1 Exchangeable Shares received by the Trustee on behalf of Holders in consideration of the issue and delivery by Veritas of shares of Veritas Common Stock in connection with the Exchange Right, during the calendar year ended on such date; and (iii) all other actions taken by the Trustee in the performance of its duties under this agreement which it had not previously reported. (e) INCOME TAX RETURNS AND REPORTS. The Trustee shall, to the extent necessary, prepare and file on behalf of the Trust appropriate Canadian income tax returns and any other returns or reports as may be required by applicable law or pursuant to the rules and regulations of any securities exchange or other trading system through which the Series 1 Exchangeable Shares are traded and, in connection therewith, may obtain the advice and assistance of such experts as the Trustee may consider necessary or advisable. If requested by the Trustee, Veritas shall retain such experts for purposes of providing such advice and assistance. (f) INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE. The Trustee shall exercise any or all of the rights, duties, powers or authorities vested in it by this agreement at the request, order or direction of any Holder upon such Holder furnishing to the Trustee reasonable funding, security and indemnity against the costs, expenses and liabilities which may be incurred by the Trustee therein or thereby, provided that no Holder shall be obligated to furnish to the Trustee any such funding, security or indemnity in connection with the exercise by the Trustee of any of its rights, duties, powers and authorities with respect to the Voting Share pursuant 20 - 20 - to Article 4 hereof, subject to Section 7(o) hereof, and with respect to the Exchange Right pursuant to Article 5 hereof, subject to Section 7(o) hereof, and with respect to the Automatic Exchange Rights pursuant to Article 5 hereof. None of the provisions contained in this agreement shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the exercise of any of its rights, powers, duties or authorities unless funded, given funds, security and indemnified as aforesaid. (g) ACTIONS BY HOLDERS. No Holder shall have the right to institute any action, suit or proceeding or to exercise any other remedy authorized by this agreement for the purpose of enforcing any of its rights or for the execution of any trust or power hereunder unless the Holder has requested the Trustee to take or institute such action, suit or proceeding and furnished the Trustee with the funding, security and indemnity referred to in Section 7(f) hereof and the Trustee shall have failed to act within a reasonable time thereafter. In such case, but not otherwise, the Holder shall be entitled to take proceedings in any court of competent jurisdiction such as the Trustee might have taken; it being understood and intended that no one or more Holders shall have any right in any manner whatsoever to affect, disturb or prejudice the rights hereby created by any such action, or to enforce any right hereunder or under the Voting Rights, the Exchange Right or the Automatic Exchange Rights, except subject to the conditions and in the manner herein provided, and that all powers and trusts hereunder shall be exercised and all proceedings at law shall be instituted, had and maintained by the Trustee, except only as herein provided, and in any event for the equal benefit of all Holders. (h) RELIANCE UPON DECLARATIONS. The Trustee shall not be considered to be in contravention of any of its rights, powers, duties and authorities hereunder if, when required, it acts and relies in good faith upon lists, mailing labels, notices, statutory declarations, certificates, opinions, reports or other papers or documents furnished pursuant to the provisions hereof or required by the Trustee to be furnished to it in the exercise of its rights, powers, duties and authorities hereunder and such lists, mailing labels, notices, statutory declarations, certificates, opinions, reports or other papers or documents comply with the provisions of Section 7(i) hereof, if applicable, and with any other applicable provisions of this agreement. (i) EVIDENCE AND AUTHORITY TO TRUSTEE. VESI and/or Veritas shall furnish to the Trustee evidence of compliance with the conditions provided for in this agreement relating to any action or step required or permitted to be taken by VESI and/or Veritas or the Trustee under this agreement or as a result of any obligation imposed under this agreement, including, without limitation, in respect of the Voting Rights or the Exchange Right or the Automatic Exchange Rights and the taking of any other action to be taken by the Trustee at the request of or on the application of VESI and/or Veritas forthwith if and when: (i) such evidence is required by any other section of this agreement to be furnished to the Trustee in accordance with the terms of this Section 7(i); or 21 - 21 - (ii) the Trustee, in the exercise of its rights, powers, duties and authorities under this agreement, gives VESI and/or Veritas written notice requiring it to furnish such evidence in relation to any particular action or obligation specified in such notice. Such evidence shall consist of an Officer's Certificate of VESI and/or Veritas or a statutory declaration or a certificate made by persons entitled to sign an Officer's Certificate stating that any such condition has been complied with in accordance with the terms of this agreement. Whenever such evidence relates to a matter other than the Voting Rights or the Exchange Right or the Automatic Exchange Rights, and except as otherwise specifically provided herein, such evidence may consist of a report or opinion of any solicitor, auditor, accountant, appraiser, valuer, engineer or other expert or any other person whose qualifications give authority to a statement made by him, provided that if such report or opinion is furnished by a director, officer or employee of VESI and/or Veritas it shall be in the form of an Officer's Certificate or a statutory declaration. Each statutory declaration, certificate, statement, opinion or report furnished to the Trustee as evidence of compliance with a condition provided for in this agreement shall include a statement by the person giving the evidence: (iii) declaring that he has read and understands the provisions of this agreement relating to the condition in question: (iv) describing the nature and scope of the examination or investigation upon which he based the statutory declaration, certificate, statement, opinion or report; and (v) declaring that he has made such examination or investigation as he believes is necessary to enable him to make the statements or give the opinions contained or expressed therein. (j) EXPERTS, ADVISERS AND AGENTS. The Trustee may: (i) in relation to these presents act and rely on the opinion or advice of or information obtained from or prepared by any solicitor, auditor, accountant, appraiser, valuer, engineer or other expert, whether retained by the Trustee or by VESI and/or Veritas or otherwise, and may retain and employ such assistants as may be necessary to the proper determination and discharge of its powers and duties and determination of its rights hereunder and may pay proper and reasonable compensation for all such legal and other advice or assistance as aforesaid; and 22 - 22 - (ii) retain and employ such agents and other assistants as it may reasonably require for the proper determination and discharge of its powers and duties hereunder, and may pay reasonable remuneration for all services performed for it (and shall be entitled to receive reasonable remuneration for all services performed by it) in the discharge of the trusts hereof and compensation for all disbursements, costs and expenses made or incurred by it in the determination and discharge of its duties hereunder and in the management of the Trust. (k) INVESTMENT OF MONEYS HELD BY TRUSTEE. Unless otherwise provided in this agreement, any moneys held by or on behalf of the Trustee which under the terms of this agreement may or ought to be invested or which may be on deposit with the Trustee or which may be in the hands of the Trustee may be invested and reinvested in the name or under the control of the Trustee in Authorized Investments, and the Trustee shall so invest such moneys on the written direction of VESI. Pending the investment of any moneys as hereinbefore provided, such moneys may be deposited in the name of the Trustee in any chartered bank in Canada or, with the consent of VESI, in the deposit department of the Trustee or any other loan or trust company authorized to accept deposits under the laws of Canada or any province thereof at the rate of interest then current on similar deposits. (l) TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not be required to give any bond or security in respect of the execution of the trusts, rights, duties, powers and authorities of this agreement or otherwise in respect of the premises. (m) TRUSTEE NOT BOUND TO ACT ON REQUEST. Except as in this agreement otherwise specifically provided, the Trustee shall not be bound to act in accordance with any direction or request of VESI and/or Veritas or of the directors thereof until a duly authenticated copy of the instrument or resolution containing such direction or request shall have been delivered to the Trustee, and the Trustee shall be empowered to act and rely upon any such copy purporting to be authenticated and believed by the Trustee to be genuine. (n) AUTHORITY TO CARRY ON BUSINESS. The Trustee represents to VESI and Veritas that at the date of execution and delivery by it of this agreement it is authorized to carry on the business of a trust company in the Province of Alberta but if, notwithstanding the provisions of this Section 7(n), it ceases to be so authorized to carry on business, the validity and enforceability of this agreement and the Voting Rights, the Exchange Right and the Automatic Exchange Rights shall not be affected in any manner whatsoever by reason only of such event but the Trustee shall, within 90 days after ceasing to be authorized to carry on the business of a trust company in the Province of Alberta, either become so authorized or resign in the manner and with the effect specified in Article 10 hereof. 23 - 23 - (o) CONFLICTING CLAIMS. If conflicting claims or demands are made or asserted with respect to any interest of any Holder in any Series 1 Exchangeable Shares, including any disagreement between the heirs, representatives, successors or assigns succeeding to all or any part of the interest of any Holder in any Series 1 Exchangeable Shares resulting in conflicting claims or demands being made in connection with such interest, then the Trustee shall be entitled, at its sole discretion, to refuse to recognize or to comply with any such claim or demand. In so refusing, the Trustee may elect not to exercise any Voting Rights, Exchange Right or Automatic Exchange Rights subject to such conflicting claims or demands and, in so doing, the Trustee shall not be or become liable to any person on account of such election or its failure or refusal to comply with any such conflicting claims or demands. The Trustee shall be entitled to continue to refrain from acting and to refuse to act until: (i) the rights of all adverse claimants with respect to the Voting Rights, Exchange Right or Automatic Exchange Rights subject to such conflicting claims or demands have been adjudicated by a final judgment of a court of competent jurisdiction; or (ii) all differences with respect to the Voting Rights, Exchange Right or Automatic Exchange Rights subject to such conflicting claims or demands have been conclusively settled by a valid written agreement binding on all such adverse claimants, and the Trustee shall have been furnished with an executed copy of such agreement. If the Trustee elects to recognize any claim or comply with any demand made by any such adverse claimant, it may in its discretion require such claimant to furnish such surety bond or other security satisfactory to the Trustee as it shall deem appropriate fully to indemnify it as between all conflicting claims or demands. (p) ACCEPTANCE OF TRUST. The Trustee hereby accepts the Trust created and provided for by and in this agreement and agrees to perform the same upon the terms and conditions herein set forth and to hold all rights, privileges and benefits conferred hereby and by law in trust for the various persons who shall from time to time be Holders, subject to all the terms and conditions herein set forth. 8. COMPENSATION (a) Veritas and VESI jointly and severally agree to pay to the Trustee reasonable compensation for all of the services rendered by it under this agreement and will reimburse the Trustee for all reasonable expenses (including but not limited to taxes, compensation paid to experts, agents and advisors and travel expenses) and disbursements, including the cost and expense of any suit or litigation of any character and any proceedings before any governmental agency reasonably incurred by the Trustee in connection with its rights and duties under this agreement; provided that Veritas and VESI shall have no obligation to reimburse the Trustee for any expenses or disbursements paid, incurred or suffered by the Trustee in any suit or 24 - 24 - litigation in which the Trustee is determined to have acted in bad faith or with negligence or willful misconduct. 9. INDEMNIFICATION AND LIMITATION OF LIABILITY (a) INDEMNIFICATION OF THE TRUSTEE. Veritas and VESI jointly and severally agree to indemnify and hold harmless the Trustee and each of its directors, officers, employees and agents appointed and acting in accordance with this agreement (collectively, the "Indemnified Parties") against all claims, losses, damages, costs, penalties, fines and reasonable expenses (including reasonable expenses of the Trustee's legal counsel on a solicitor and his own client basis) which, without fraud, negligence, willful misconduct or bad faith on the part of such Indemnified Party, may be paid, incurred or suffered by the Indemnified Party by reason of or as a result of the Trustee's acceptance or administration of the Trust, its compliance with its duties set forth in this agreement, or any written or oral instructions delivered to the Trustee by Veritas or VESI pursuant hereto. In no case shall Veritas or VESI be liable under this indemnity for any claim against any of the Indemnified Parties unless Veritas and VESI shall be notified by the Trustee of the written assertion of a claim or of any action commenced against the Indemnified Parties, promptly after any of the Indemnified Parties shall have received any such written assertion of a claim or shall have been served with a summons or other first legal process giving information as to the nature and basis of the claim. Subject to (ii), below, Veritas and VESI shall be entitled to participate at their own expense in the defense and, if Veritas or VESI so elect at any time after receipt of such notice, either of them may assume the defense of any suit brought to enforce any such claim. The Trustee shall have the right to employ separate counsel in any such suit and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of the Trustee unless: (i) the employment of such counsel has been authorized by Veritas or VESI, such authorization not to be unreasonably withheld; or (ii) the named parties to any such suit include both the Trustee and Veritas or VESI and the Trustee shall have been advised by counsel acceptable to Veritas or VESI that there may be one or more legal defenses available to the Trustee that are different from or in addition to those available to Veritas or VESI and that an actual or potential conflict of interest exists (in which case Veritas and VESI shall not have the right to assume the defense of such suit on behalf of the Trustee but shall be liable to pay the reasonable fees and expenses of counsel for the Trustee). This indemnity shall survive the resignation or removal of the Trustee and the termination of this agreement. (b) LIMITATION OF LIABILITY. The Trustee shall not be held liable for any loss which may occur by reason of depreciation of the value of any part of the Trust Estate or any loss incurred on any investment of funds pursuant to this agreement, except to the extent that such loss is attributable to the fraud, negligence, willful misconduct or bad faith on the part of the Trustee. 25 - 25 - 10. CHANGE OF TRUSTEE (a) RESIGNATION. The Trustee, or any trustee hereafter appointed, may at any time resign by giving written notice of such resignation to Veritas and VESI specifying the date on which it desires to resign, provided that such notice shall never be given less than 60 days before such desired resignation date unless Veritas and VESI otherwise agree and provided further that such resignation shall not take effect until the date of the appointment of a successor trustee and the acceptance of such appointment by the successor trustee. Upon receiving such notice of resignation, Veritas and VESI shall promptly appoint a successor trustee by written instrument in duplicate, one copy of which shall be delivered to the resigning trustee and one copy to the successor trustee. Failing acceptance by a successor trustee, a successor trustee may be appointed by an order of the Alberta Court of Queen's Bench upon application of one or more of the parties hereto. Should the retiring Trustee apply for the appointment of a successor trustee by an order of the Alberta Court of Queen's Bench it shall be at the joint and several expense of Veritas and VESI. (b) REMOVAL. The Trustee, or any trustee hereafter appointed, may be removed with or without cause, at any time on 60 days' prior notice by written instrument executed by Veritas and VESI, in duplicate, one copy of which shall be delivered to the trustee so removed and one copy to the successor trustee, provided that, in connection with such removal, provision is made for a replacement trustee similar to that contemplated in Section 10(a). (c) SUCCESSOR TRUSTEE. Any successor trustee appointed as provided under this agreement shall execute, acknowledge and deliver to Veritas and VESI and to its predecessor trustee an instrument accepting such appointment. Thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor under this agreement, with like effect as if originally named as trustee in this agreement. However, on the written request of Veritas and VESI or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of this agreement, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon the request of any such successor trustee, Veritas, VESI and such predecessor trustee shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. (d) NOTICE OF SUCCESSOR TRUSTEE. Upon acceptance of appointment by a successor trustee as provided herein, Veritas and VESI shall cause to be mailed notice of the succession of such trustee hereunder to each Holder specified in a List. If Veritas or VESI shall fail to cause such notice to be mailed within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of Veritas and VESI. 26 - 26 - 11. VERITAS SUCCESSORS (a) CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. Veritas shall not enter into any transaction (whether by way of reconstruction, reorganization, consolidation, merger, amalgamation, transfer, sale, lease or otherwise) whereby all or substantially all of its undertaking, property and assets would become the property of any other Person or, in the case of a merger or amalgamation, of the continuing corporation resulting therefrom unless, but may do so if: (i) such other Person or continuing corporation (the "Veritas Successor"), by operation of law, becomes, without further action, bound by the terms and provisions of this agreement or, if not so bound, executes, prior to or contemporaneously with the consummation of such transaction an agreement supplemental hereto and such other instruments (if any) as are satisfactory to the Trustee and in the opinion of legal counsel to the Trustee are necessary or advisable to evidence the assumption by the Veritas Successor of liability for all moneys payable and property deliverable hereunder and the covenant of such Veritas Successor to pay and deliver or cause to be delivered the same and its agreement to observe and perform all the covenants and obligations of Veritas under this agreement; and (ii) such transaction shall, to the satisfaction of the Trustee and in the opinion of legal counsel to the Trustee, be upon such terms as substantially to preserve and not to impair in any material respect any of the rights, duties, powers and authorities of the Trustee or of the Holders hereunder. (b) VESTING OF POWERS IN SUCCESSOR. Whenever the conditions of Section 11(a) hereof have been duly observed and performed, the Trustee, if required, by Section 11(a) hereof, the Veritas Successor and VESI shall execute and deliver the supplemental agreement provided for in Article 12 hereof and thereupon the Veritas Successor shall possess and from time to time may exercise each and every right and power of Veritas under this agreement in the name of Veritas or otherwise and any act or proceeding by any provision of this agreement required to be done or performed by the board of directors of Veritas or any officers of Veritas may be done and performed with like force and effect by the directors or officers of such Veritas Successor. (c) WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed as preventing the amalgamation or merger of any wholly-owned subsidiary of Veritas with or into Veritas or the winding-up, liquidation or dissolution of any wholly-owned subsidiary of Veritas provided that all of the assets of such subsidiary are transferred to Veritas or another wholly-owned subsidiary of Veritas, and any such transactions are expressly permitted by this Article 11. 27 - 27 - 12. AMENDMENTS AND SUPPLEMENTAL AGREEMENTS (a) AMENDMENTS, MODIFICATIONS, ETC. This agreement may not be amended or modified except by an agreement in writing executed by VESI, Veritas and the Trustee and approved by the Holders in accordance with Section 9.2 of the Exchangeable Share Provisions. (b) MINISTERIAL AMENDMENTS. Notwithstanding the provisions of Section 12(a) hereof, the parties to this agreement may in writing, at any time and from time to time, without the approval of the Holders, amend or modify this agreement for the purposes of: (i) adding to the covenants of any or all of the parties hereto for the protection of the Holders hereunder; (ii) making such amendments or modifications not inconsistent with this agreement as may be necessary or desirable with respect to matters or questions which, in the opinion of the board of directors of each of Veritas and VESI and in the opinion of the Trustee and its counsel, having in mind the best interests of the Holders as a whole, it may be expedient to make, provided that such boards of directors and the Trustee and its counsel shall be of the opinion that such amendments and modifications will not be prejudicial to the interests of the Holders as a whole; or (iii) making such changes or corrections which, on the advice of counsel to VESI, Veritas and the Trustee, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error, provided that the Trustee and its counsel and the board of directors of each of VESI and Veritas shall be of the opinion that such changes or corrections will not be prejudicial to the interests of the Holders as a whole. (c) MEETING TO CONSIDER AMENDMENTS. VESI, at the request of Veritas, shall call a meeting or meetings of the Holders for the purpose of considering any proposed amendment or modification requiring approval pursuant hereto. Any such meeting or meetings shall be called and held in accordance with the by-laws of VESI, the Exchangeable Share Provisions and all applicable laws. (d) CHANGES IN CAPITAL OF VERITAS AND VESI. At all times after the occurrence of any event effected pursuant to Section 2(g) or Section 2(h) of the Support Agreement, as a result of which either Veritas Common Stock or the Series 1 Exchangeable Shares or both are in any way changed, this agreement shall forthwith be amended and modified as necessary in order that it shall apply with full force and effect, mutatis mutandis, to all new securities into which Veritas Common Stock or the Series 1 Exchangeable Shares or both are so changed and the parties hereto shall execute and deliver a supplemental agreement giving effect to and evidencing such necessary amendments and modifications. 28 - 28 - (e) EXECUTION OF SUPPLEMENTAL AGREEMENTS. No amendment to or modification or waiver of any of the provisions of this agreement otherwise permitted hereunder shall be effective unless made in writing and signed by all of the parties hereto. From time to time VESI (when authorized by a resolution of its Board of Directors), Veritas (when authorized by a resolution of its board of directors) and the Trustee may, subject to the provisions of these presents, and they shall, when so directed by these presents, execute and deliver by their proper officers, agreements or other instruments supplemental hereto, which thereafter shall form part hereof, for any one or more of the following purposes: (i) evidencing the succession of any Veritas Successors to Veritas and the covenants of and obligations assumed by each such Veritas Successors in accordance with the provisions of Article 11 and the successor of any successor trustee in accordance with the provisions of Article 10; (ii) making any additions to, deletions from or alterations of the provisions of this agreement or the Voting Rights, the Exchange Right or the Automatic Exchange Rights which, in the opinion of the Trustee and its counsel, will not be prejudicial to the interests of the Holders as a whole or are in the opinion of counsel to the Trustee necessary or advisable in order to incorporate, reflect or comply with any legislation the provisions of which apply to Veritas, VESI, the Trustee or this agreement; and (iii) for any other purposes not inconsistent with the provisions of this agreement, including without limitation to make or evidence any amendment or modification to this agreement as contemplated hereby, provided that, in the opinion of the Trustee and its counsel, the rights of the Trustee and the Holders as a whole will not be prejudiced thereby. 13. TERMINATION (a) TERM. The Trust created by this agreement shall continue until the earliest to occur of the following events: (i) no outstanding Series 1 Exchangeable Shares are held by a Holder; (ii) each of VESI and Veritas elects in writing to terminate the Trust and such termination is approved by the Holders of the Series 1 Exchangeable Shares in accordance with Section 9.2 of the Exchangeable Share Provisions; and (iii) 21 years after the death of the last survivor of the descendants of His Majesty King George VI of the United Kingdom of Great Britain and Northern Ireland living on the date of the creation of the Trust. 29 - 29 - (b) SURVIVAL OF AGREEMENT. This agreement shall survive any termination of the Trust and shall continue until there are no Series 1 Exchangeable Shares outstanding held by a Holder; provided, however, that the provisions of Articles 8 and 9 hereof shall survive any such termination of this agreement. 14. GENERAL (a) SEVERABILITY. If any provision of this agreement is held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remainder of this agreement shall not in any way be affected or impaired thereby and the agreement shall be carried out as nearly as possible in accordance with its original terms and conditions. (b) INUREMENT. This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns and to the benefit of the Holders. (c) NOTICES TO PARTIES. All notices and other communications between the parties hereunder shall be in writing and shall be deemed to have been given if delivered personally or by confirmed telecopy to the parties at the following addresses (or at such other address for such party as shall be specified in like notice): (i) if to Veritas at: Veritas DGC Inc. 3701 Kirby Drive, Suite 112 Houston, Texas 77098 Attention: Chairman Telecopy: (713) 526-5611 (ii) if to VESI at: Veritas Energy Services Inc. Suite 300, 615 - Third Avenue S.W. Calgary, Alberta T2P 0G9 Attention: President Telecopy: (403) 266-9359 (iii) if to the Trustee at: if by mail or delivery: CIBC Mellon Trust Company 600 The Dome Tower 333 - 7th Avenue S.W. Calgary, Alberta T2P 2Z1 Telecopy: (403) 232-2400 30 - 30 - Any notice or other communication given personally shall be deemed to have been given and received upon delivery thereof and if given by telecopy shall be deemed to have been given and received on the date of receipt thereof unless such day is not a Business Day in which case it shall be deemed to have been given and received upon the immediately following Business Day. (d) NOTICE OF HOLDERS. Any and all notices to be given and any documents to be sent to any Holders may be given or sent to the address of such Holder shown on the register of Holders of Series 1 Exchangeable Shares in any manner permitted by the Exchangeable Share Provisions and shall be deemed to be received (if given or sent in such manner) at the time specified in such Exchangeable Share Provisions, the provisions of which the Exchangeable Share Provisions shall apply mutatis mutandis to notices or documents as aforesaid sent to such Holders. (e) RISK OF PAYMENTS BY POST. Whenever payments are to be made or documents are to be sent to any Holder by the Trustee, by VESI or by Veritas or by such Holder to the Trustee or to Veritas or VESI, the making of such payment or sending of such document sent through the post shall be at the risk of VESI or Veritas, in the case of payments made or documents sent by the Trustee or VESI or Veritas, and the Holder, in the case of payments made or documents sent by the Holder. (f) COUNTERPARTS. This agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. A counterpart delivered by facsimile is hereby deemed to be as effective as a counterpart delivered in original form. (g) JURISDICTION. This agreement shall be construed and enforced in accordance with the laws of the Province of Alberta and the laws of Canada applicable therein. (h) ATTORNMENT. Veritas agrees that any action or proceeding arising out of or relating to this agreement may be instituted in the courts of Alberta, waives any objection which it may have now or hereafter to the venue of any such action or proceeding, irrevocably submits to the jurisdiction of the said courts in any such action or proceeding, agrees to be bound by any judgment of the said courts and agrees not to seek, and hereby waives, any review of the merits of any such judgment by the courts of any other jurisdiction and hereby appoints VESI at its registered office in the Province of Alberta as Veritas' attorney for service of process. 31 - 31 - IN WITNESS WHEREOF, the parties hereby have caused this agreement to be duly executed as of the date first above written. VERITAS DGC INC. Per: /s/ LARRY WORDEN ----------------------------------- ----------------------------------- VERITAS ENERGY SERVICES INC. Per: /s/ LARRY WORDEN ----------------------------------- ----------------------------------- CIBC MELLON TRUST COMPANY Per: /s/ DANEAL MC GEEIN ----------------------------------- /s/ J. FISHER ----------------------------------- EX-10.C 4 5TH AMENDED - 1992 NONQUALIFIED STOCK OPTION PLAN 1 EXHIBIT 10.C VERITAS DGC INC. FIFTH AMENDED AND RESTATED 1992 EMPLOYEE NONQUALIFIED STOCK OPTION PLAN (AS AMENDED AND RESTATED SEPTEMBER 30, 1999) 1. PURPOSE. The purpose of this 1992 Employee Nonqualified Stock Option Plan (the "Plan") of Veritas DGC Inc. (the "Company") (formerly known as Digicon Inc.) is to provide officers and other key employees with a continuing proprietary interest in the Company. The Plan is intended to advance the interests of the Company by enabling it (i) to increase the interest in the Company's welfare of those employees who share the primary responsibility for the management, growth, and protection of the business of the Company, (ii) to furnish an incentive to such persons to continue their services to the Company, (iii) to provide a means through which the Company may continue to induce able management and operating personnel to enter its employ, and (iv) to provide a means through which the Company may effectively compete with other organizations offering similar incentive benefits in obtaining and retaining the services of competent management and operating personnel. 2. STOCK SUBJECT TO THE PLAN. The Company may grant from time to time options to purchase shares of the Company's authorized but unissued common stock, par value $.01 per share, or treasury shares of the common stock. Subject to adjustment as provided in Section 11 hereof, the aggregate number of shares which may be issued or covered by options pursuant to the Plan is 3,954,550 shares, as adjusted for the one for three reverse stock split effective January 17, 1995. Shares of common stock applicable to options which have expired unexercised or terminated for any reason may again be subject to an option or options under the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Compensation Committee of the Company's board of directors (the "Committee"). The board of directors may, from time to time, remove members from or add members to the Committee. Vacancies in the Committee, however caused, shall be filled by the board of directors. No member of the Committee shall be eligible to receive options under the Plan. The Committee shall select one of its members chairman and shall hold meetings at such times and places as it may determine. The Committee may appoint a secretary and, subject to the provisions of the Plan and to policies determined by the board of directors, may make such rules and regulations for the conduct of its business as it shall deem advisable. A majority of the Committee shall constitute a quorum. All action of the Committee shall be taken by a majority of its members. Any action may be taken by a written instrument signed by a majority of the members, and action so taken shall be fully as effective as if it had been taken by a vote of the majority of the members at a meeting duly called and held. 2 (b) Subject to the express terms and conditions of the Plan, the Committee shall have full power to construe or interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. (c) Subject to the provisions of Sections 4 and 5 hereof, the Committee may, from time to time, determine which employees of the Company or subsidiary corporations shall be granted options under the Plan, the number of shares subject to each option, and the time or times at which options shall be granted. (d) The Committee shall report to the board of directors the names of employees granted options, and the number of option shares subject to, and the terms and conditions of, each option; provided, however that no option may be granted to an otherwise eligible employee if, after giving effect to the proposed grant, such employee would then hold options covering more than 500,000 shares of common stock under the Plan. (e) No member of the board of directors or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option. 4. ELIGIBILITY. All full-time salaried employees of the Company and of its majority-owned subsidiaries shall be eligible to participate in the Plan, and options may be granted by the Committee to eligible employees designated by the Committee, either at the Committee's own initiative or upon the recommendation of management. In determining the employees to whom options shall be granted and the number of shares to be covered by each option, the Committee may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the success of the Company, and such other factors as the Committee in its discretion shall deem relevant. The Company shall effect the granting of options under the Plan in accordance with the determination made by the Committee. 5. PRICE OF OPTIONS. The option price per share shall be not less than the lesser of (i) fair market value of the common stock on the date the option is granted or (ii) the average fair market value for the common stock during the thirty trading days ending on the trading day next preceding the date the option is granted. Fair market value on any day shall be deemed to be the last reported sale price of the common stock on the principal stock exchange on which the Company's common stock is traded on that date. If no trading occurred on such date, or, if at the time the common stock shall not be listed for trading, fair market value shall be deemed to be the mean between the quoted bid and asked prices for the common stock on such exchange or in the over-the-counter market, as the case may be, on that date. Page 2 3 6. TERM OF OPTION. No option shall be exercisable after the expiration of ten years from the date the option is granted. 7. EXERCISE OF OPTIONS. (a) General. Except as provided below, each option may be exercised at such times and in such amounts as the Committee in its discretion may provide. (a) Manner of Exercising Options. Shares of common stock purchased under options shall at the time of purchase be paid for in full. To the extent that the right to purchase shares has accrued hereunder, options may be exercised from time to time by written notice to the Company stating the full number of shares with respect to which the option is being exercised, and the time of delivery thereof, which shall be at least 15 days after the giving of such notice unless an earlier date shall have been mutually agreed upon. At such time, the Company shall, without transfer or issue tax to the optionee (or other person entitled to exercise the option) deliver to the optionee (or to such other person) at the principal office of the Company, or such other place as shall be mutually acceptable, a certificate or certificates for such shares against prior payment of the option price in full on the date of notice of exercise for the number of shares to be delivered by certified or official bank check or the equivalent thereof acceptable to the Company; provided, however, that the time of such issuance and delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law, the listing requirements of the New York Stock Exchange or any other exchange on which the common stock may then be listed. If the optionee (or other person entitled to exercise the option) fails to pay for all or any part of the number of shares specified in such notice or to accept delivery of such shares upon tender of delivery thereof, the right to exercise the option with respect to such undelivered shares shall be terminated. 8. NON-ASSIGNABILITY OF OPTION RIGHTS. No option granted under the Plan shall be assignable or transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of an optionee, the option shall be exercisable only by him. 9. TERMINATION OF EMPLOYMENT. Except as otherwise provided in this paragraph, options shall terminate 90 days following the termination of the optionee's employment with the Company for any reason, but shall be exercisable following termination only to the extent that the option had become vested on the termination date. In the event that the optionee retires from the Company (at or after age 65) the optionee shall have the right, subject to the provisions of Section 6, to exercise his option at any time within one year after such termination, to the extent that such option had become vested on the termination date. If, however, the optionee shall die in the employment of the Company, then for the lesser of the maximum period during which such option might have been exercisable Page 3 4 or one year after the date of death, his estate, personal representative, or beneficiary shall have the same right to exercise the option of such employee as he would have had if he had survived and remained in the employment of the Company. For purposes of this Section 9, employment by any majority-owned subsidiary corporation of the Company shall be deemed employment by the Company. In the discretion of the Committee, a leave of absence approved in writing by the board of directors of the Company shall not be deemed a termination of employment; however, no option may be exercised during such leave of absence. 10. CHANGE OF CONTROL. If, at any time, a person, entity or group (including, in each case, all other persons, entities or groups controlling, controlled by, or under common control with or acting in concert or concurrently with, such person, entity or group) shall hold, purchase or acquire beneficial ownership (including without limitation power to vote) of 50% or more of the then outstanding shares of the Company's common stock, then any portion of the Options which have not yet become exercisable shall thereupon become immediately exercisable. 11. ADJUSTMENT OF OPTIONS ON RECAPITALIZATION OR REORGANIZATION. The aggregate number of shares of common stock on which options may be granted to persons participating under the Plan, the aggregate number of shares of common stock on which options may be granted to any one such person, the number of shares thereof covered by each outstanding option, and the price per share thereof in each such option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of common stock of the Company resulting from the subdivision or combination of shares or other capital adjustments, or the payment of a stock dividend after the effective date of this Plan, or other increase or decrease in such shares effected without receipt of consideration by the Company; provided, however, that no adjustment shall be made unless the aggregate effect of all such increases and decreases occurring in any one fiscal year after the effective date of this Plan will increase or decrease the number of issued shares of common stock of the Company by 5% or more; and, provided, further, that any options to purchase fractional shares resulting from any such adjustment shall be eliminated. Subject to any required action by the stockholders and to Section 10 hereof, if the Company shall be the surviving or resulting corporation in any merger or consolidation, any option granted hereunder shall pertain to and apply to the securities to which a holder of the number of shares of common stock subject to option would have been entitled had such option been exercised immediately preceding such merger or consolidation; but a dissolution or liquidation of the Company, or a merger or consolidation in which the Company is not the surviving or resulting corporation (except for a change in Control as defined in Section 10 hereof in which case Section 10 shall govern then outstanding options) shall cause every option outstanding hereunder to terminate, except that the surviving or resulting corporation may, in its absolute and uncontrolled discretion, tender an option or options to purchase its shares on its Page 4 5 terms and conditions, both as to the number of shares and otherwise. Adjustments under this Section shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 12. AGREEMENTS BY OPTIONEE. Each individual optionee shall agree: (a) If requested by the Company, at the time of exercise of any option, to execute an agreement stating that he is purchasing the shares subject to option for investment purposes and not with a view to the resale or distribution thereof; (b) To authorize the Company to withhold from his gross pay any tax which it believes is required to be withheld with respect to any benefit under the Plan, and to hold as security for the amount to be withheld any property otherwise distributable to the optionee under the Plan until the amounts required to be withheld have been so withheld. 13. RIGHTS AS A SHAREHOLDER. The optionee shall have no rights as a stockholder with respect to any shares of common stock of the Company held under option until the date of issuance of the stock certificates to him for such shares. 14. EFFECTIVE DATE. The Plan was effective as of September 1, 1992, upon approval by the holders of a majority of the shares of outstanding capital stock present at the December 17, 1992 annual meeting of the Company's stockholders. The Plan was amended by the board of directors on August 29, 1997, amended and restated by the board of directors on March 10, 1997, and December 9, 1998, and amended by the board of directors on March 9, 1999. 15. AMENDMENTS. (a) The board of directors may, from time to time, alter, suspend or terminate the Plan, or alter or amend any and all option agreements granted thereunder but only for one or more of the following purposes: (1) To modify the administrative provisions of the Plan or options; (2) To make any other amendment which does not materially alter the intent or benefits of the Plan; or Page 5 6 (3) Increase the maximum number of shares as to which options may be granted under the Plan either to all persons participating in the Plan or to any one such person. (b) It is expressly provided that no such action of the board of directors may, without the approval of the stockholders, alter the provisions of the Plan or option agreements granted thereunder so as to: (1) Decrease the option price applicable to any options granted under the Plan, provided, however, that the provisions of this clause (1) shall not prevent the granting, to any person holding an option under the Plan, of additional options under the Plan exercisable at a lower option price; or (2) Alter any outstanding option agreement to the detriment of the optionee, without his consent. 16. EMPLOYMENT OBLIGATION. The granting of any option under this Plan shall not impose upon the Company any obligation whatsoever to employ or to continue to employ any optionee, and the right of the Company to terminate the employment of any officer or other employee shall not be diminished or affected by reason of the fact that an option has been granted to him under the Plan. 17. VES OPTIONS. In order to carry out the terms of (i) the Combination Agreement dated May 10, 1996, between the Company and Veritas Energy Services Inc. ("VES") which was approved by the Company's stockholders at a special meeting held on August 20, 1996 and (ii) the Plan of Arrangement under Part 15 of the Business Corporations Act (Alberta) relating to the combination of the Company and VES which, pursuant to an interim order of the Court of Queen's Bench of Alberta date July 18, 1996, was approved at special meetings of VES optionholders and shareholders held August 20, 1996, this Plan shall include under its terms each of the options (the "VES Options") outstanding on the Effective Date (as defined in the Combination Agreement) (which includes all outstanding options granted under VES' Stock Option Plan for Directors, Officers and Key Employees (the "VES Option Plan")) without any further action on the part of any holder thereof (each a "VES Optionholder"). Effective as of the Effective Time, each VES Option will be exercisable to purchase that number of shares of the Company's common stock determined by multiplying the number of VES common shares (the "VES Common Shares") subject to such VES Option at the Effective Time by the Exchange Ratio (as defined in the Combination Agreement), at an exercise price per share of such VES Option immediately prior to the Effective Time, divided by the Exchange Ratio. On the Effective Date (as defined in the Combination Agreement), such option price shall be converted into a United States dollar equivalent based on the noon spot rate of exchange of the Bank of Canada on such date. If the foregoing calculation results in an exchanged VES Option being exercisable for a fractional share of the Company's common stock, then the number of shares of Page 6 7 the Company's common stock subject to such option will be rounded down to the nearest whole number of shares and the total exercise price for the option will be reduced by the exercise price of the fractional share. The term, exercisability, vesting schedule and all other terms and conditions of the VES Options will otherwise be unchanged and shall operate in accordance with their terms, notwithstanding anything to the contrary contained herein. 18. ENERTEC OPTIONS In order to carry out the terms of (i) the Combination Agreement dated as of March 30, 1999, which was approved by the Company's stockholders at a special meeting held on September 21, 1999, and (ii) the Plan of Arrangement under Part 15 of the Business Corporations Act (Alberta) relating to the combination of the Company and Enertec Resource Services Inc., which, pursuant to an amended interim order of the Court of Queen's Bench of Alberta dated August 11, 1999, was approved at special meetings of Enertec option holders and shareholders held September 22, 1999, this Plan shall include under its terms each of the options (the "Enertec Options") outstanding on the Effective Date (as defined in the Combination Agreement)(which includes all outstanding options granted under Enertec's stock option plans for directors, officers and employees (collectively, the "Enertec Option Plan")) without any further action on the part of any holder thereof (each a "Enertec Optionholder"). Effective as of the Effective Time, each Enertec Option will be exercisable to purchase that number of shares of the Company's common stock determined by multiplying the number of Enertec common shares (the "Enertec Common Shares") subject to such Enertec Option at the Effective Time by the Exchange Ratio (as defined in the Combination Agreement), at an exercise price per share of the Company's common stock equal to the exercise price per share of such Enertec Option immediately prior the Effective Time, divided by the Exchange Ratio. On the Effective Date (as defined in the Combination Agreement), such option price shall be converted into a United States dollar equivalent based on the rate of exchange as stated in The Wall Street Journal next published after the Effective Time. If the foregoing calculation results in an exchanged Enertec Option being exercisable for a fractional share of the Company's common stock, then the number of shares of the Company's common stock subject to such option will be rounded down to the nearest whole number of shares and the total exercise price for the option will be reduced by the exercise price of the fractional share. Each exchanged Enertec Option shall be: (a) fully vested immediately after the Effective Time; and (b) for a term commencing at the Effective Time and ending as follows: (1) for each optionholder who: (i) is an Enertec director, officer or employee as at the Effective Time (a "Current Optionholder"); and (ii) after the Effective Time is employed or retained by the Company, Enertec or one of their Subsidiaries, on the date as set forth in subsections 5(b) and (d) of the Enertec Option Plan; Page 7 8 (2) for each Current Optionholder who at the Effective Time is not retained as a director, officer or employee of the Company, Enertec or one of their subsidiaries, on the date that is the first business day on or immediately after the date that is 90 days after the later of the Effective Date and the date such director, officer or employee is terminated; or (3) notwithstanding the provisions of (1) and (2) above, the Enertec Option Plan or the Plan, for each Current Optionholder with an Executive Termination Contract (as defined in the Combination Agreement), on the current expiry date of such option (the sixth anniversary date). The term, exerciseability, and all other terms and conditions of the Enertec Options will otherwise be unchanged and shall operate in accordance with their terms, notwithstanding anything to the contrary contained herein." Page 8 EX-10.J 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10-J EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made and entered into by and between Veritas DGC Inc., a Delaware corporation (hereinafter referred to as "Employer"), and Timothy L. Wells, an individual currently resident in Harris County, Texas (hereinafter referred to as "Employee") effective as of July 1, 1999. Attendant to Employee's employment by Employer, Employer and Employee wish for there to be a complete understanding and agreement between Employer and Employee with respect to, among other terms, Employee's duties and responsibilities to Employer; the compensation and benefits owed to Employee; the fiduciary duties owed by Employee to Employer; Employee's obligation to avoid conflicts of interest, disclose pertinent information to Employer, and refrain from using or disclosing Employer's information; and the term of employment. NOW, THEREFORE, in consideration of Employee's continued employment by Employer and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employer and Employee agree as follows: Section 1. General Duties of Employer and Employee. a. Employer agrees to employ Employee, and Employee agrees to accept employment by Employer and to serve Employer in an executive capacity as its President and Chief Operating Officer. The duties and responsibilities of Employee include those described for the particular position in the Bylaws of Employer or other documents of Employer, and such other or additional duties as may from time-to-time be assigned to Employee by the Board of Directors of Employer (hereinafter referred to as the "Board") or any duly authorized committee thereof or an authorized officer of Employer. b. While employed hereunder, Employee shall devote substantially all of his time, efforts, skills and attention for the benefit of and with his primary attention to the affairs of Employer in order that he shall faithfully perform his duties and obligations. The preceding sentence shall not, however, be deemed to restrict Employee from attending to matters or engaging in activities not directly related to the business of Employer, provided that (i) such activities or matters are reasonable in scope and time commitment and not otherwise in violation of this Agreement, and (ii) Employee shall not become a director of any corporation or other entity (excluding charitable or other non-profit organizations) without prior written disclosure to, and consent of, Employer. c. Employee agrees and acknowledges that he owes a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the best interests of Employer and to do no act which would injure Employer's business, its interests or its reputation. 2 Section 2. Compensation and Benefits. a. To the extent that Employee has not received or been reimbursed for the following items under the terms of the Foreign Service Agreement dated as of September 1, 1998 between him and Veritas DGC Asia Pacific Ltd. (the "Foreign Services Agreement"), Employer shall pay or reimburse Employee for the following items: i. One (1) each least cost airline ticket for Employee and each of his family members from Singapore to Houston; ii. All reasonable expenses incurred by Employee for moving his and his family's personal effects by sea from Singapore to Houston; iii. Temporary living accommodations selected by the Company and reasonable living expenses (excluding entertainment) for a period designated by the Company; iv. A relocation bonus equal to one month's salary due within thirty (30) days of taking up permanent residency in the Houston, Texas area; v. Preparation of 1999 tax returns for Singapore and the U.S. by an accounting firm to be designated by Employer (including a final accounting under the tax equalization program). b. As compensation for services to Employer, Employer shall pay to Employee during the term of this Agreement a salary at an annual rate of $220,000. The salary shall be payable in equal installments every two weeks or on such other schedule as Employer may establish from time to time for its management personnel. c. Employee shall be reimbursed in accordance with Employer's normal expense reimbursement policy for all of the actual and reasonable costs and expenses incurred by him in the performance of his services and duties hereunder, including, but not limited to, travel and entertainment expenses. Employee shall furnish Employer with all invoices and vouchers reflecting amounts for which Employee seeks Employer's reimbursement. d. Employee shall be entitled to participate in all insurance and retirement plans, incentive compensation plans (at a level appropriate to his position) and such other benefit plans or programs as may be in effect from time-to-time for the key management employees of Employer including, without limitation, those related to savings and thrift, retirement, welfare, medical, dental, disability, salary continuance, accidental death, travel accident, life insurance, incentive bonus, membership in business and professional organizations, reimbursement of business and entertainment expenses, physical examinations, and financial, legal and tax counseling. e. Employer shall indemnify Employee for claims and expenses to the extent provided in Employer's Bylaws. -2- 3 f. All salary, bonus and other payments made by Employer to Employee pursuant to this Agreement shall be subject to such payroll and withholding deductions as may be required by law and other deductions applied generally to employees of Employer for insurance and other employee benefit plans in which Employee participates. Section 3. Fiduciary Duty; Confidentiality. a. In keeping with Employee's fiduciary duties to Employer, Employee agrees that he shall not knowingly become involved in a conflict of interest, or upon discovery thereof, allow such a conflict to continue. Moreover, Employee agrees that he shall disclose to the Board any facts, which might involve a conflict of interest that has not been approved by the Board. b. As part of Employee's fiduciary duties to Employer, Employee agrees to protect and safeguard Employer's information, ideas, concepts, improvements, discoveries, and inventions and any proprietary, confidential and other information relating to Employer or its business not generally available to the public (collectively, "Confidential Information") and, except as may be expressly required by Employer, Employee shall not, either during his employment by Employer or thereafter, directly or indirectly, use for his own benefit or for the benefit of another, or disclose to another, any Confidential Information, except as may be required by any applicable law, rule, regulation or order. c. Upon termination of his employment with Employer, or at any other time upon request, Employee shall immediately deliver to Employer all documents embodying any of Employer's Confidential Information. Section 4. Term and Termination. a. The term of Employee's employment hereunder shall be for a period of two years, commencing July 1, 1999 and ending June 30, 2001, unless earlier terminated in accordance with the terms of this Agreement; provided, that beginning July 1, 2001 and on each July 1st thereafter, such term of employment shall be extended automatically for an additional one-year period unless Employer or Employee gives the other notice of intent to terminate this Agreement at least thirty days prior to such July 1st. b. This Agreement shall terminate upon Employee's death. c. Employer may terminate this Agreement by reason of Employee's Disability (as hereinafter defined) after such condition of Disability has existed for at least 180 consecutive days. Employer shall give to Employee sixty days notice of its intention to effect such termination pursuant to this Section 4.c. As used in this Agreement, "Disability" shall mean permanent and total disability within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or any successor provision. -3- 4 d. Employer may terminate this Agreement upon the determination by a majority of the entire Board that Cause (as hereinafter defined) exists therefor. As used in this Agreement, "Cause" means (i) the willful and continued failure by Employee substantially to perform his obligations under this Agreement (other than any such failure resulting from his incapacity due to physical and mental illness) after a demand for substantial performance has been delivered to him by the Board which specifically identifies the manner in which the Board believes Employee has not substantially performed such provisions, (ii) Employee's willfully engaging in conduct materially and demonstrably injurious to the property or business of Employer, including without limitation, fraud, misappropriation of funds or other property of Employer, other willful misconduct, gross negligence or commission of a felony or other crime of moral turpitude, or (iii) Employee's breach of this Agreement. If the Board determines that Cause exists, the parties agree that such determination shall be subject to inquiry or dispute only as to its reasonableness. If the Board makes such determination, Employer may (A) terminate this Agreement effective immediately or at a subsequent date or (B) condition Employee's continued employment upon such considerations or requirements as may be reasonable under the circumstances and place a reasonable limitation upon the time within which Employee shall comply with such considerations or requirements. e. Employee shall have the right to terminate this Agreement and his employment hereunder at any time for "Good Reason," which for purposes of this Agreement means Employer's failure to comply with any of the provisions of Section 2 of this Agreement and which failure is not remedied within thirty days after receipt of written notice from Employee. Section 5. Effect of Termination. a. Upon termination of this Agreement by Employer for Cause; by Employee other than for Good Reason; or due to the death or Disability of Employee, all compensation and benefits shall cease upon the date of termination other than: (i) those benefits that are provided by retirement and benefit plans and programs specifically adopted and approved by Employer for Employee that are earned and vested by the date of termination, (ii) the pro rata annual salary through the date of termination; (ii) any incentive compensation due Employee if, under the terms of the relevant incentive compensation arrangement, such incentive compensation was due and payable to Employee on or before the date of termination; and (iii) medical and similar benefits the continuation of which is required by applicable law. b. Upon termination of (i) this Agreement by Employer in accordance with Section 4.a.; (ii) Employee's employment by Employer at any time for any reason other than for Cause or due to Employee's death or Disability; or (iii) this Agreement by Employee for Good Reason during the term hereof, the obligations of Employer and Employee under Sections 1 and 2 shall terminate as of the date this Agreement is terminated, and Employer shall pay or provide to Employee: i. Employee's pro rata annual salary through the date of termination; ii. incentive compensation due Employee, if any, under the terms of the relevant incentive compensation arrangement; and -4- 5 iii. within thirty days of said termination, a severance benefit equal to two years of Employee's annual base salary. All other compensation and benefits shall cease upon the date of termination other than (i) those benefits that are provided by retirement and benefit plans and programs specifically adopted and approved by Employer for Employee that are earned and vested by the date of termination, (ii) Employee's pro rata annual salary through the date of termination, and (iii) medical and similar benefits the continuation of which is required by applicable law. As a condition to making the payments specified in this Section 5.b., Employer will require that Employee execute a release of any claims Employee may have against Employer at the time of Employee's termination. Such release will be in such form as Employer reasonably requests. Section 6. Vacation. a. Employee will be entitled to paid vacation of not less than four weeks each year in accordance with Employer's policy and guideline manual. Employee acknowledges receipt from Employer of a copy of said manual. Vacation may also be taken by Employee at the time and for the periods as may be mutually agreed upon between Employer and Employee. Section 7. Miscellaneous. a. For a period of one year after the termination of Employee's employment with Employer, Employee shall not, either on his own account or for any person, firm, partnership, corporation, or other entity (i) solicit, interfere with, or endeavor to cause any employee of Employer or its affiliates to leave his or her employment; or (ii) induce or attempt to induce any such employee to breach her or his employment agreement with Employer. b. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be delivered by hand, by facsimile, by express courier service or by registered or certified mail, return receipt requested to the addresses set forth below in this Section 7. All such notices and other communications shall, if delivered by hand, be deemed given when actually received; if delivered by facsimile, be deemed given if transmitted by telecopier during normal business hours, otherwise on the next succeeding business day; and if delivered by mail, be deemed given on the earlier of (a) when received or (b) three business days after being so mailed. If to Employer, to: Veritas DGC Inc. 3701 Kirby Drive, Suite 630 Houston, Texas 77098 Attention: David B. Robson If to Employee, to: -5- 6 Mr. Timothy L. Wells c/o Veritas DGC Inc. 3701 Kirby Drive, Suite 630 Houston, Texas 77098 or to such other names or addresses as Employer or Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section. c. This Agreement shall be binding upon and inure to the benefit of Employer, its successors, legal representatives and assigns, and upon Employee, his heirs, executors, administrators, representatives and assigns; provided, however, Employee agrees that his rights, duties and obligations hereunder are personal to him and may not be assigned by him without the express written consent of Employer. d. This Agreement supersedes, replaces and merges all previous agreements and discussions relating to the same or similar subject matters between Employee and Employer, including, specifically, the Foreign Services Agreement, and constitutes the entire agreement between Employee and Employer with respect to the subject matter of this Agreement. This Agreement may not be modified in any respect by any verbal statement, representation or agreement made by any employee, officer, or representative of Employer or by any written agreement unless signed by an officer of Employer who is expressly authorized by the Board to execute such document. e. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. In addition, if any provision of this Agreement is held by an arbitration panel or a court of competent jurisdiction to be invalid, unenforceable, unreasonable, unduly restrictive or overly broad, the parties intend that such arbitration panel or court modify said provision so as to render it valid, enforceable, reasonable and not unduly restrictive or overly broad. f. The internal laws of the State of Texas will govern the interpretation, validity, enforcement and effect of this Agreement without regard to the place of execution or the place for performance thereof. Section 8. Arbitration. a. 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 shall be resolved by arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (the "AAA Rules"). Any arbitration must be initiated within one year after the action or occurrence about which the party initiating the arbitration is complaining. Arbitration shall 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 shall designate an arbitrator. The appointed -6- 7 arbitrators shall then appoint a neutral arbitrator. Employee and Employer agree that the decision of the arbitrators shall 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 favor of Employee, Employer shall reimburse Employee for his reasonable costs of arbitration up to $20,000 in the aggregate. Regardless of the outcome of the arbitration, Employer shall pay all fees and expenses of the arbitrators and all of Employer's costs of arbitration. b. Notwithstanding the provisions of Section 8.a., Employer may, if it so chooses, bring an action in any court of competent jurisdiction for injunctive relief to enforce Employee's obligations under Section 3.b., 3.c., or 7.a. hereof. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first written above. EMPLOYER: VERITAS DGC INC. By: /s/ DAVID B. ROBSON ------------------------------------- David B. Robson Chairman of the Board and Chief Executive Officer EMPLOYEE: /s/ TIMOTHY L. WELLS ---------------------------------------- Timothy L. Wells -7- EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of the Registrant at July 31, 1999 owned by the Registrant or one or more of its other subsidiaries:
STATE OR COUNTRY CORPORATE NAME OF SUBSIDIARY OF INCORPORATION - ---------------------------- -------------------- Veritas Energy Services Inc................................. Canada Veritas DGC Land Ltd........................................ Canada Canex Information Services Ltd.............................. Canada Veritas Geoservices Ltd..................................... Canada Veritas Energy Services (US) Inc............................ Canada Veritas Energy Services Inc................................. Canada Digicon Geophysical Corp.................................... Delaware Veritas DGC Asia Pacific Ltd................................ Delaware Veritas DGC Ltd............................................. United Kingdom Veritas DGC Australia (Pty) Ltd............................. Australia Veritas DGC Land Inc........................................ Delaware Veritas Seismic S.A......................................... Venezuela Veritas DGC (Malaysia) Sdn. Bhd............................. Malaysia Veritas DGC (B) Sdn Bhd..................................... Brunei Veritas Geophysical Inc..................................... Delaware Veritas DGC Land Guatemala S.A.............................. Guatemala Digicon de Venezuela C.A.................................... Venezuela Digicon (Nigeria) Ltd....................................... Nigeria Veritas DGC Singapore Pte. Ltd.............................. Singapore P.T. Digicon Mega Pratama................................... Indonesia Digital Exploration (Nigeria) Limited....................... Nigeria Seismic Company of America, Inc............................. Delaware Euroseis, Inc............................................... Delaware Veritas Geophysical I....................................... Cayman Islands Veritas Geophysical II...................................... Cayman Islands Veritas Geophysical III..................................... Cayman Islands Veritas Geophysical IV...................................... Cayman Islands Veritas Geophysical do Brasil, Ltda......................... Brazil Digicon Finance N.V......................................... Netherlands Antilles VTS Properties, Inc......................................... Delaware Geophysical Services Inc.................................... Delaware Digicon Sub Corp............................................ Delaware Veritas Geophysical (Norway) AS............................. Norway 674916 Alberta Ltd.......................................... Canada Time Seismic Exchange Ltd................................... Canada
EX-23 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-09679, No. 333-38377, No. 333-41829, No. 333-48953, No. 333-57603, No. 333-65081, No. 333-70721, No. 333-74305 and No. 333-87223) and the Registration Statements on Form S-3 (No. 33-63875, No. 333-10517, No. 333-17517, No. 333-85569 and No. 333-86247) of Veritas DGC Inc., of our report dated October 8, 1999, relating to the financial statements, which appears in this Form 10-K. PRICEWATERHOUSECOOPERS Houston, Texas October 14, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUL-31-1999 AUG-01-1998 JUL-31-1999 73,447 3,671 113,761 3,038 4,417 230,855 357,397 201,026 541,846 84,605 0 0 0 214 315,344 541,846 0 388,905 0 266,000 0 0 12,623 30,163 9,566 20,294 0 0 0 20,294 .89 .88
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