UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended April 30, 2005

 

 

 

OR

 

 

o

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 incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

10300 Town Park
Houston, Texas

 

77072

(Address of principal executive offices)

 

(Zip Code)

 

(832) 351-8300

(Registrant’s telephone number, including area code)

 

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 o No ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes
ý  No o

 

The number of shares of the Company’s common stock, $.01 par value, outstanding at May 31, 2005 was 33,849,816 (including 155,370 Veritas Energy Services Inc. exchangeable shares which are identical to the company’s common stock in all material respects).

 

 



 

TABLE OF CONTENTS

 

FORM 10-Q

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended April 30, 2005 and 2004

 

Consolidated Balance Sheets as of April 30, 2005 and July 31, 2004

 

Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2005 and 2004

 

Notes to Consolidated Financial Statements

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

 

ITEM 4.

CONTROLS AND PROCEDURES

 

 

PART II. OTHER INFORMATION

 

 

ITEM 6.

EXHIBITS

 

SIGNATURES

 

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.       Financial Statements

 

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

Restated
2004

 

2005

 

Restated
2004

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

175,510

 

$

180,714

 

$

497,319

 

$

428,177

 

Cost of services

 

132,957

 

147,911

 

393,898

 

376,625

 

Research and development

 

4,676

 

4,118

 

13,790

 

11,258

 

General and administrative

 

8,632

 

7,240

 

23,597

 

19,823

 

Operating income

 

29,245

 

21,445

 

66,034

 

20,471

 

Interest expense

 

1,140

 

8,874

 

2,803

 

17,350

 

Other (income), net

 

(2,454

)

(562

)

(4,043

)

(1,067

)

Income before provision for income taxes

 

30,559

 

13,133

 

67,274

 

4,188

 

Provision for income taxes

 

12,152

 

3,069

 

30,521

 

7,515

 

Net income (loss)

 

$

18,407

 

$

10,064

 

$

36,753

 

$

(3,327

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

$

.54

 

$

.30

 

$

1.09

 

$

(.10

)

Weighted average common shares (including exchangeable shares)

 

33,792

 

33,455

 

33,775

 

33,598

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

.52

 

$

.29

 

$

1.05

 

$

(.10

)

Weighted average common shares (including exchangeable shares)

 

35,131

 

34,601

 

34,970

 

33,598

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,407

 

$

10,064

 

$

36,753

 

$

(3,327

)

Other comprehensive income (loss) (net of tax, $0 in all periods):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(889

)

(3,654

)

5,699

 

2,373

 

Other unrealized gain (loss)

 

(342

)

19

 

(116

)

(585

)

Total other comprehensive income (loss)

 

(1,231

)

(3,635

)

5,583

 

1,788

 

Comprehensive income (loss)

 

$

17,176

 

$

6,429

 

$

42,336

 

$

(1,539

)

 

See Notes to Consolidated Financial Statements

 

1



 

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

(Unaudited)

 

 

 

April 30,
2005

 

July 31,
2004

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

238,453

 

$

116,299

 

Restricted cash investments

 

236

 

111

 

Accounts and notes receivable (net of allowance of $858 and $1,109 respectively)

 

144,727

 

166,810

 

Materials and supplies inventory

 

4,899

 

4,198

 

Prepayments and other

 

11,493

 

15,599

 

Income taxes receivable

 

 

12,617

 

Total current assets

 

399,808

 

315,634

 

 

 

 

 

 

 

Property and equipment

 

494,777

 

479,639

 

Less accumulated depreciation

 

373,695

 

357,976

 

Property and equipment, net

 

121,082

 

121,663

 

 

 

 

 

 

 

Multi-client data library

 

293,228

 

313,153

 

Deferred tax asset

 

1,513

 

1,223

 

Other assets

 

23,311

 

24,573

 

Total

 

$

838,942

 

$

776,246

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

49,274

 

$

44,907

 

Accrued and deferred income taxes

 

12,946

 

7,145

 

Other accrued liabilities

 

70,909

 

67,650

 

Total current liabilities

 

133,129

 

119,702

 

Non-current liabilities:

 

 

 

 

 

Long-term debt

 

155,000

 

155,000

 

Other non-current liabilities

 

15,330

 

11,854

 

Total non-current liabilities

 

170,330

 

166,854

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.01 par value; issued: 35,014,376 shares and 34,821,298 shares, respectively (excluding Exchangeable Shares of 155,370 and 185,921, respectively)

 

350

 

348

 

Additional paid-in capital

 

445,470

 

441,982

 

Accumulated earnings

 

99,897

 

63,144

 

Accumulated other comprehensive income:

 

 

 

 

 

Cumulative foreign currency translation adjustment

 

13,030

 

7,331

 

Other comprehensive income (loss)

 

(999

)

(883

)

Unearned compensation

 

(606

)

(604

)

Treasury stock, at cost; 1,319,930 shares and 1,317,532 shares, respectively

 

(21,659

)

(21,628

)

Total stockholders’ equity

 

535,483

 

489,690

 

Total

 

$

838,942

 

$

776,246

 

 

See Notes to Consolidated Financial Statements

 

2



 

VERITAS DGC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended April 30,

 

 

 

2005

 

Restated
2004

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

36,753

 

$

(3,327

)

Non-cash items included in net income (loss):

 

 

 

 

 

Depreciation and amortization, net (other than multi-client data library)

 

33,164

 

31,871

 

Amortization of multi-client data library

 

103,559

 

163,837

 

Loss (gain) on disposition of property and equipment

 

(638

)

137

 

Equity in loss of joint venture

 

 

959

 

Deferred taxes

 

(372

)

782

 

Amortization of unearned compensation

 

263

 

311

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

26,870

 

(39,379

)

Materials and supplies inventory

 

(696

)

1,814

 

Prepayments and other

 

4,013

 

873

 

Income tax payable

 

19,632

 

3,764

 

Accounts payable and other accrued liabilities

 

6,637

 

(3,388

)

Other

 

10,625

 

(6,083

)

Net cash provided by operating activities

 

239,810

 

152,171

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

(Increase) decrease in restricted cash

 

(125

)

94

 

Investment in multi-client data library, net cash

 

(77,558

)

(97,366

)

Purchase of property and equipment

 

(43,533

)

(20,652

)

Sale of property and equipment

 

1,240

 

1,225

 

Sale of (RC)2 software operation

 

 

2,000

 

Net cash used by investing activities

 

(119,976

)

(114,699

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowing of long-term debt

 

 

155,000

 

Payments on long-term debt

 

 

(167,238

)

Net proceeds from sale of common stock

 

1,918

 

9,119

 

Purchase of treasury stock

 

 

(20,000

)

Net cash provided (used) by financing activities

 

1,918

 

(23,119

)

Currency loss on foreign cash

 

402

 

68

 

Change in cash and cash equivalents

 

122,154

 

14,421

 

Beginning cash and cash equivalents balance

 

116,299

 

72,097

 

Ending cash and cash equivalents balance

 

$

238,453

 

$

86,518

 

 

 

 

 

 

 

 

 

 

 

 

 

Schedule of non-cash transactions:

 

 

 

 

 

Capitalization of depreciation and amortization resulting in an increase in
multi-client data library

 

$

7,015

 

$

14,380

 

 

See Notes to Consolidated Financial Statements

 

3



 

VERITAS DGC INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Summary of significant accounting policies

 

Restatement of Financial Statements

 

The historical financial information for the three and nine months ended April 30, 2004 have been restated due to accounting errors.  In September 2004, we found various types of errors in our balance sheet related primarily to clerical and account reconciliation errors associated with the intercompany transfers of property and foreign currency items.  In addition, we found errors in the accounting for certain customer contracts that contained provisions for customer payment of equipment mobilization fees, revenue sharing with customers and certain other contingencies.  Correction of these errors resulted in a decrease of net income of $1.4 million relating to the first three fiscal quarters of fiscal 2004 and $2.6 million related to periods prior to fiscal 2004.  Since recording the required adjustments in the fourth quarter of fiscal 2004 would have had a material impact on the financial statements of the fourth quarter and those of the full fiscal year, we determined that a restatement of our prior years’ financial statements was appropriate.  The impact of the restatement resulted in a decrease in the net income and net income per share of $105,000 and $0.00, respectively, for the three months ended April 30, 2004 and an increase in the net loss and net loss per common share of $1,388,000 and $0.04, respectively, for the nine months ended April 30, 2004.  (See Note 9 for the details of this restatement.)

 

The restatement has not caused us to be in default under any of our debt covenants or lease agreements. We obtained waivers from our lenders under our Credit Facility extending the due date for our delivery of our third quarter financial statements to them to July 29, 2005.  Additionally, the restatement has delayed the registration of our Convertible Senior Notes resulting in liquidated damages in the amount of $2,153 per day from August 31, 2004 until the registration is completed.

 

Consolidation

 

The accompanying consolidated financial statements include our accounts and the accounts of majority-owned domestic and foreign subsidiaries. All material intercompany balances and transactions have been eliminated.  All material adjustments consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been reflected. These interim financial statements should be read in conjunction with our annual audited consolidated financial statements.

 

In December 2003, the Financial Accounting Standards Board issued FIN 46R, a revision to FIN 46 “Consolidation of Variable Interest Entities.”  FIN 46R replaces FIN 46 and provides additional clarification on the application of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.  We adopted FIN 46R on April 30, 2004.  Adoption did not have a material effect on our financial position or results of operations; however, it required consolidation of our 80% owned Indonesian joint venture.  Prior to adoption of FIN 46R this joint venture was accounted for under the equity method.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

4



 

Recent Accounting Pronouncements

 

In October 2004, the Emerging Issues Task Force of the Financial Accounting Standards Board issued EITF 04-8, “The Effect of Contingently Issuable Debt on Earnings per Share”, which is effective for periods ending after December 15, 2004.  This statement requires us to include shares of our stock issuable upon the assumed conversion of our Convertible Senior Notes in the calculation of diluted weighted average common shares.  We adopted the EITF during the first quarter of fiscal 2005; however, the contingently issuable shares related to our Convertible Senior Notes had no impact on our weighted average shares calculation for the three and nine month periods ended April 30, 2005, as the calculation would have been anti-dilutive.

 

 

2.     Multi-client library accounting change

 

Effective August 1, 2003, we changed our minimum amortization policy with regard to multi-client data and recorded a charge of $22.1 million in the first quarter of fiscal 2004, included in cost of services in our Consolidated Statement of Operations.  Under the prior method, capitalized costs of multi-client surveys were charged to cost of services in the period sales occurred, using the sales forecast method, over an estimated five-year useful life.  However, during the last 24 months of a survey’s useful life, amortization was the greater of the amount resulting from the sales forecast method or straight-line amortization of the remaining book value over the remaining portion of the original five-year estimated useful life.  Under the new method, capitalized costs of multi-client surveys are charged to cost of services over an estimated five-year useful life based upon the greater of the result (higher expense) under the sales forecast method or cumulative straight-line amortization from survey completion over an estimated five-year useful life.  Notwithstanding this change, the sales forecast method remains our primary method of calculating cost of services.  The total amortization period that concludes sixty months after survey completion represents the minimum period over which the surveys are expected to provide economic benefits.  We believe that commencing the minimum amortization upon survey completion, as opposed to our prior method of doing so only during the last twenty four months of the survey’s life, better reflects the potential diminution of survey value with the passage of time.

 

3.     Other (income), net

 

Other (income) expense, net consists of the following:

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

Restated
2004

 

2005

 

Restated
2004

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

(1,553

)

$

(250

)

$

(3,080

)

$

(734

)

Net gain on foreign currency exchange

 

(308

)

(492

)

(90

)

(745

)

Loss from unconsolidated joint venture

 

 

345

 

 

958

 

Other

 

(593

)

(165

)

(873

)

(546

)

Total

 

$

(2,454

)

$

(562

)

$

(4,043

)

$

(1,067

)

 

5



 

4.     Earnings per common share

 

Basic and diluted earnings per common share are computed as follows:

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

Restated
2004

 

2005

 

Restated
2004

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

18,407

 

$

10,064

 

$

36,753

 

$

(3,327

)

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average common shares (including exchangeable shares)

 

33,792

 

33,455

 

33,775

 

33,598

 

Income (loss) per share

 

$

.54

 

$

.30

 

$

1.09

 

$

(.10

)

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average common shares (including exchangeable shares)

 

33,792

 

33,455

 

33,775

 

33,598

 

Shares issuable from assumed exercise of options

 

1,295

 

1,146

 

1,149

 

 

Shares issuable from assumed vesting of restricted stock

 

44

 

 

46

 

 

Total

 

35,131

 

34,601

 

34,970

 

33,598

 

Income (loss) per share

 

$

.52

 

$

.29

 

$

1.05

 

$

(.10

)

 

The Convertible Senior Notes were not convertible as of April 30, 2005 and the shares issuable from such conversion, while considered, are not included in this income per share calculation as they are anti-dilutive (See Note 5 for a description of our Convertible Senior Notes.)

 

The following options to purchase common shares have been excluded from the computation assuming dilution because the exercise prices of the options exceed the average market price of the underlying common shares or the options are anti-dilutive due to a net loss.

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Number of options

 

397,130

 

1,012,682

 

729,496

 

3,503,724

 

Exercise price range

 

$27.81-55.13

 

$19.38-55.13

 

$24.44-55.13

 

$5.25-55.13

 

Expiring through

 

March 2012

 

March 2012

 

March 2012

 

March 2012

 

 

5.     Long-term debt

 

As of April 30, 2005, our long-term debt outstanding consisted of $155.0 million of Convertible Senior Notes due 2024.  In addition, we have a Credit Facility consisting primarily of a revolving loan facility permitting borrowings of up to $55.0 million and various unsecured lines of credit totaling $8.5 million which may be used exclusively for letters of credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a per annum rate which equals the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%.  The current interest rate on the Convertible Senior Notes from March 15, 2004 through June 14, 2005 equated to 2.26% and equates to 2.66% for the subsequent three month period.  The Convertible Senior Notes are our senior unsecured obligations and are convertible under certain circumstances into a combination of cash and our common stock.  In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the note and shares of our common stock for the note’s conversion

 

6



 

value in excess of such principal amount.  We entered into a registration rights agreement in which we agreed to file a registration statement with the Securities and Exchange Commission within 90 days of March 3, 2004 to register resales of the notes and the associated shares of common stock.  We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, the registration statement is not yet effective.  Because our registration statement was not effective on or before August 31, 2004 as required by the indenture, we have been incurring liquidated damages in the amount of $2,153 per day since August 31, 2004.  We will continue to incur these damages until our registration statement is effective.

 

Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash and shares of our common stock.  Certain of these circumstances may result in classification of the Convertible Senior Notes as current on our balance sheet.  These circumstances include:

 

1.                                       the closing sale price of our common stock is over 120% of the conversion price, which is currently $24.03 (with 120% being $28.84) for 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the fiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       if we called the notes for redemption and the redemption has not occurred;

 

3.                                       the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of the notes; or

 

4.                                       the occurrence of specified corporate transactions.

 

Should any of these circumstances occur, the Convertible Senior Notes would be convertible at the then current stock price times the conversion ratio of 41.6146. This amount would be payable in cash equal to the principal amount of the notes, the par value adjusted for dividends or other equity transactions, with the additional amount payable in shares of our common stock.  Currently, the maximum amount payable by us on conversion is $155 million in cash plus approximately 6.5 million shares. For clarity, conversion at a $40 stock price would result in our payment of $155 million in cash and 2.575 million shares of common stock.  This settlement method is prescribed in the indenture and is not optional at the discretion of any party.  The shares issuable from such conversion are considered in the calculation of diluted earnings per share.

 

As of April 30, 2005, there were no borrowings and $3.1 million in letters of credit outstanding under the Credit Facility.  Borrowings under the Credit Facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing.  The Credit Facility expires in February 2006.  Borrowings under the Credit Facility are secured by substantially all of our assets, including the accounts receivable from certain of our foreign subsidiaries.

 

We obtained waivers from our lenders under our Credit Facility allowing us to deliver our required reports for the second and third quarters of fiscal 2005 to the lenders by no later than July 29, 2005.

 

We have various unsecured lines of credit, with lending institutions that operate in geographic areas not covered by the lending institutions in our Credit Facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees.  As of April 30, 2005, $3.5 million in letters of credit were outstanding under these lines.

 

7



 

6.     Pension plan

 

We maintain a contributory defined benefit pension plan for eligible participating employees in the United Kingdom.  The following is the net periodic benefit cost by component:

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

Restated

 

 

 

Restated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Service cost (benefits earned during the period)

 

$

155

 

$

134

 

$

459

 

$

423

 

Interest cost on projected benefit obligation

 

316

 

260

 

935

 

824

 

Expected return on plan assets

 

(225

)

(194

)

(666

)

(615

)

Amortization of prior service cost

 

(38

)

(35

)

(112

)

(110

)

Amortization of net gain

 

79

 

82

 

235

 

258

 

Amortization of transition obligation

 

2

 

2

 

6

 

5

 

Net periodic benefit costs

 

$

289

 

$

249

 

$

857

 

$

785

 

 

We have made contributions to this plan based on the schedule of contributions on which the above service cost was based and expect to complete these contributions, totaling approximately $1.0 million for the year, during fiscal 2005.

 

7.     Segment information

 

Beginning in fiscal 2005, we organized the company into three geographic regions: North and South America (NASA); Europe, Africa, the Middle East and CIS (EAME); and Asia Pacific (APAC).  Our geographic segments offer a common suite of products and services to their customers, although each product or service may be adapted to meet the needs of the local markets.  This segmentation of our company is representative of the manner in which it is viewed and managed by our senior managers and our Board of Directors.  The information related to the three and nine months ended April 30, 2004 has been restated to reflect the new segment structure.  A reconciliation of the reportable segments’ results to those of the total enterprise is given below:

 

 

 

For the Three Months Ended April 30, 2005

 

 

 

NASA

 

EAME

 

APAC

 

Corporate

 

Total

 

 

 

(In thousands)

 

Revenues

 

$

115,478

 

$

30,636

 

$

29,396

 

$

 

$

175,510

 

Operating income (loss)

 

25,635

 

7,498

 

4,336

 

(8,224

)

29,245

 

Assets

 

472,130

 

103,251

 

51,508

 

212,053

 

838,942

 

 

 

 

For the Three Months Ended April 30, 2004

 

 

 

Restated

 

 

 

NASA

 

EAME

 

APAC

 

Corporate

 

Total

 

 

 

(In thousands)

 

Revenues

 

$

143,535

 

$

17,169

 

$

20,010

 

$

 

$

180,714

 

Operating income (loss)

 

28,573

 

790

 

1,405

 

(9,323

)

21,445

 

Assets

 

513,400

 

103,425

 

48,913

 

99,274

 

765,012

 

 

 

 

For the Nine Months Ended April 30, 2005

 

 

 

NASA

 

EAME

 

APAC

 

Corporate

 

Total

 

 

 

(In thousands)

 

Revenues

 

$

330,335

 

$

95,487

 

$

71,497

 

$

 

$

497,319

 

Operating income (loss)

 

68,692

 

14,998

 

5,453

 

(23,109

)

66,034

 

Assets

 

472,130

 

103,251

 

51,508

 

212,053

 

838,942

 

 

8



 

 

 

For the Nine Months Ended April 30, 2004

 

 

 

Restated

 

 

 

NASA

 

EAME

 

APAC

 

Corporate

 

Total

 

 

 

(In thousands)

 

Revenues

 

$

322,750

 

$

62,690

 

$

42,737

 

$

 

$

428,177

 

Operating income (loss)

 

44,984

 

(1,132

)

2,682

 

(26,063

)

20,471

 

Assets

 

513,400

 

103,425

 

48,913

 

99,274

 

765,012

 

 

Corporate operating income (loss) includes certain general and administrative and research and development expenses not allocated to the segments.  Corporate assets consist primarily of cash and cash equivalents.

 

8.     Stock based compensation

 

We account for stock based employee compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25 and have adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 148.  As required by SFAS No. 148, we disclose the effect on net income and earnings per share of equity-based employee compensation, including stock options, that would have been recorded using the fair value based method.  SFAS No. 123R, which will become effective for us beginning with our first quarter of fiscal 2006, will require us to record the cost of this equity-based compensation in our income statement based on the estimated fair value of the awards.

 

 

 

Three Months Ended
April 30,

 

Nine Months Ended
April 30,

 

 

 

2005

 

Restated
2004

 

2005

 

Restated
2004

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) as reported

 

$

18,407

 

$

10,064

 

$

36,753

 

$

(3,327

)

Add: Compensation expense, net of related tax effects

 

84

 

47

 

263

 

203

 

Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(648

)

(835

)

(2,002

)

(4,187

)

Pro forma net income (loss)

 

$

17,843

 

$

9,276

 

$

35,014

 

$

(7,311

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

.54

 

$

.30

 

$

1.09

 

$

(.10

)

Pro-forma

 

.53

 

.28

 

1.04

 

(.22

)

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

.52

 

$

.29

 

$

1.05

 

$

(.10

)

Pro-forma

 

.51

 

.27

 

1.00

 

(.22

)

 

9



 

9.         Restatement

 

The historical financial information in this document for the three and nine month periods ended April 30, 2004 has been restated due to accounting errors.  These errors were discovered during two separate reviews, a comprehensive review of our balance sheet and a review of specific types of our customer contracts.

 

Balance Sheet Review

 

During our fiscal 2004 year-end balance sheet review, we found various types of clerical and account reconciliation errors related primarily to the intercompany transfer of property and foreign currency items.  The fixed asset errors of approximately $1.9 million affected depreciation and amortization charges over the past seven years.  We corrected all matters identified in the balance sheet review in our restatement, although such items were not individually material.

 

Contract Review

 

We also reviewed our accounting for our customer contracts, including those that contain provisions for customer payment of mobilization fees, revenue sharing with customers and certain date contingencies.  Because our contracts vary widely in terms and conditions, we reviewed the deliverables of each type of contract and, where required, applied the guidance of EITF 00-21.  We determined that our accounting treatment for certain of these customer contracts was not in accordance with generally accepted accounting principles and adjusted our accounts accordingly.  We had recognized mobilization fees as revenue during the period of mobilization rather than during the period of seismic data acquisition, as required by Staff Accounting Bulletin (SAB) No. 104.  In contracts with revenue sharing clauses and date contingencies, we recognized revenue before the price to be ultimately paid by the related customer was fixed or determinable under SAB No.104.  In all cases, our errors related to customer contracts were related to the timing of revenue recognition.

 

The following is a summary of the effect of the restatement adjustments on our previously reported net income, earnings per share and total assets:

 

 

 

Increase / (Decrease) from Previously
Reported Amounts for the

 

 

 

Three Months
Ended
April 30, 2004

 

Nine Months
Ended
April 30, 2004

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

Net income (loss) as previously reported

 

$

10,169

 

$

(1,939

)

Pretax adjustments resulting from:

 

 

 

 

 

Balance sheet review

 

15

 

(886

)

Contract review

 

(172

)

(659

)

Total pretax adjustments

 

(157

)

(1,545

)

Tax effect of restatement adjustments

 

(52

)

(157

)

Total net adjustments

 

(105

)

(1,388

)

Net Income (loss) restated

 

$

10,064

 

$

(3,327

)

 

 

 

 

 

 

Income (loss) per common share — diluted:

 

 

 

 

 

As reported

 

$

.29

 

$

(.06

)

Effect of the net adjustments

 

.00

 

(.04

)

As restated

 

$

.29

 

$

(.10

)

 

 

 

 

 

 

Total assets as reported

 

$

763,316

 

 

 

Adjustments

 

1,696

 

 

 

Total assets as adjusted

 

$

765,012

 

 

 

 

The following are excerpts from the restated financial statements for the three and nine months ended April 30, 2004 compared to the previously reported amounts:

 

10



 

RESTATED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

(In thousands, except per share amounts)

 

 

 

Three Months Ended April 30, 2004

 

Nine Months Ended April 30, 2004

 

 

 

As
Reported

 

Adjustments

 

Restated

 

As
Reported

 

Adjustments

 

Restated

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

176,547

 

$

4,167

 

$

180,714

 

$

428,667

 

$

(490

)

$

428,177

 

Cost of services

 

143,487

 

4,424

 

147,911

 

375,492

 

1,133

 

376,625

 

Research and development

 

4,118

 

 

4,118

 

11,258

 

 

11,258

 

General and administrative

 

7,217

 

23

 

7,240

 

19,791

 

32

 

19,823

 

Operating income (loss)

 

21,725

 

(280

)

21,445

 

22,126

 

(1,655

)

20,471

 

Interest expense

 

8,874

 

 

8,874

 

17,349

 

1

 

17,350

 

Other income, net

 

(439

)

(123

)

(562

)

(956

)

(111

)

(1,067

)

Income (loss) before provision for income taxes

 

13,290

 

(157

)

13,133

 

5,733

 

(1,545

)

4,188

 

Income taxes

 

3,121

 

(52

)

3,069

 

7,672

 

(157

)

7,515

 

Net income (loss)

 

$

10,169

 

$

(105

)

$

10,064

 

$

(1,939

)

$

(1,388

)

$

(3,327

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share

 

$

.30

 

$

.00

 

$

.30

 

$

(.06

)

$

(.04

)

$

(.10

)

Weighted average common shares (including exchangeable shares)

 

33,455

 

 

33,455

 

33,598

 

 

33,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share

 

$

.29

 

$

.00

 

$

.29

 

$

(.06

)

$

(.04

)

$

(.10

)

Weighted average common shares (including exchangeable shares)

 

34,601

 

 

34,601

 

33,598

 

 

33,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

10,169

 

$

(105

)

$

10,064

 

$

(1,939

)

$

(1,388

)

$

(3,327

)

Other comprehensive income (loss) (net of tax, $0 in all periods):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(3,541

)

(113

)

(3,654

)

2,394

 

(21

)

2,373

 

Other unrealized gain (loss)

 

19

 

 

19

 

(585

)

 

(585

)

Total other comprehensive income (loss)

 

(3,522

)

(113

)

(3,635

)

1,809

 

(21

)

1,788

 

Comprehensive income (loss)

 

$

6,647

 

$

(218

)

$

6,429

 

$

(130

)

$

(1,409

)

$

(1,539

)

 

11



 

RESTATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED APRIL 30, 2004

(UNAUDITED)

 

(Dollars in thousands)

 

 

 

As
Reported

 

Adjustments

 

Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,939

)

$

(1,388

)

$

(3,327

)

Non-cash items included in net income (loss):

 

 

 

 

 

 

 

Depreciation and amortization, net (other than multi-client)

 

31,655

 

216

 

31,871

 

Amortization of multi-client library

 

163,390

 

447

 

163,837

 

(Gain) / loss on disposition of property and equipment

 

137

 

 

137

 

Equity in loss of joint venture

 

958

 

1

 

959

 

Deferred taxes

 

782

 

 

782

 

Amortization of unearned compensation

 

311

 

 

311

 

Change in operating assets/liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable

 

(39,730

)

351

 

(39,379

)

Materials and supplies inventory

 

1,802

 

12

 

1,814

 

Prepayments and other

 

603

 

270

 

873

 

Income tax receivable

 

4,328

 

(564

)

3,764

 

Accounts payable and other accrued liabilities

 

(3,815

)

427

 

(3,388

)

Other

 

(6,126

)

43

 

(6,083

)

Total cash provided by operating activities

 

152,356

 

(185

)

152,171

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Decrease (increase) in restricted cash investments

 

94

 

 

94

 

Investment in multi-client library, net cash

 

(97,333

)

(33

)

(97,366

)

Purchase of property and equipment

 

(20,652

)

 

(20,652

)

Sale of property and equipment

 

1,225

 

 

1,225

 

Sale of (RC) (2) software operating

 

2,000

 

 

2,000

 

Total cash used by investing activities

 

(114,666

)

(33

)

(114,699

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowing of long-term debt

 

155,000

 

 

155,000

 

Payments on long-term debt

 

(167,238

)

 

(167,238

)

Net proceeds from the sale of common stock

 

9,119

 

 

9,119

 

Purchase of treasury stock

 

(20,000

)

 

(20,000

)

Total cash provided by financing activities

 

(23,119

)

 

(23,119

)

Currency loss (gain) on foreign cash

 

68

 

 

68

 

Change in cash and cash equivalents

 

14,639

 

(218

)

14,421

 

Beginning cash and cash equivalents balance

 

72,626

 

(529

)

72,097

 

Ending cash and cash equivalents balance

 

$

87,265

 

$

(747

)

$

86,518

 

 

 

 

 

 

 

 

 

Schedule of non-cash transactions:

 

 

 

 

 

 

 

Capitalization of depreciation and amortization resulting in an increase in multi-client data library

 

$

14,380

 

$

 

$

14,380

 

 

12



 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This report on Form 10-Q and the documents incorporated by reference contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements incorporated by reference to other documents we file with the SEC. Forward-looking statements include, among other things, business strategy and expectations concerning industry conditions, market position, future operations, margins, profitability, liquidity and capital resources. Forward-looking statements generally can be identified by the use of terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similar expressions or the negatives thereof. These expectations are based on management’s assumptions and current beliefs based on currently available information.  Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectation will be correct. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report on Form 10-Q. Our operations are subject to a number of uncertainties, risks and other influences, many of which are outside our control, and any one of which, or a combination of which, could cause our actual results of operations to differ materially from the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are disclosed in “Risk Factors” and elsewhere in our Annual Report on Form 10-K.

 

Overview

 

We believe that, overall, global exploration for oil and gas is increasing, even in mature areas such as the North Sea and Nigeria.  While seismic has traditionally been used purely as an exploration tool, we are seeing increasing interest in new seismic reservoir imaging techniques, such as multi- or wide-azimuth acquisition, which offer better delineation of complex structures and may advance the use of seismic in hydrocarbon production.  We believe all of this is promising for our business, although seismic spending will undoubtedly continue to fluctuate.

 

Our overall performance during the fiscal 2005 period is the result of being well positioned to take advantage of the increased exploration spending.  This positioning includes having quality multi-client data in areas of current customer interest, data processing abilities that enable us to produce the best possible seismic images in difficult areas, and field operations that are capable of providing technical as well as health, safety and environmental excellence.

 

Due to our selling and operational efforts and the robust seismic market, we have seen our backlog increase $117 million from $147 million at July 31, 2004 to $264 million at May 31, 2005.  We expect to complete most of the work in backlog over the next twelve months.  It appears that our traditional pattern of revenue generation will occur again during fiscal 2005, with revenues in our second and third fiscal quarters being higher than in our first and fourth quarters.  This pattern is driven by end-of-year spending, which results in high library revenue in our second fiscal quarter, and high land acquisition activity during our second and third fiscal quarters, corresponding with the winter seismic season in Alaska and Canada.

 

During the first quarter of fiscal 2005, we reorganized our company into three geographic regions: North and South America (NASA), Europe, Africa, Middle East and CIS (EAME), and Asia Pacific (APAC).  The managers of these regions are responsible for all facets of sales and operations and represent our customer interface.  Centrally managed processing, acquisition, and reservoir professionals support these managers from locations around the globe.  We feel this new organization allows our front-line managers to focus exclusively on their customers while allowing our company to develop and deploy technology consistently across our markets.  We have put processes in place that will allow for the free movement of our seismic equipment across the three regions so that we may maximize our return on investment.

 

Restatement

 

The historical financial information in this document has been restated for the three and nine months ended April 30, 2004 due to accounting errors.  The impact of the restatement resulted in a decrease in the net income and net income per share of $105,000 and $0.00, respectively, for the three months ended April 30, 2004 and an increase in the net loss and net loss per common share of $1,388,000 and $0.04, respectively, for the nine months ended April 30, 2004.  (See Note 9 of the Notes to Consolidated Financial Statements for the details of this restatement.)

 

13



 

Results of operations

 

Three months ended April 30, 2005 compared with three months ended April 30, 2004 (restated)

 

Revenues.  Our revenues decreased by 3% from $180.7 million in the third quarter of fiscal 2004 to $175.5 million in the third quarter of fiscal 2005.  This decrease is the result of lower land and marine multi-client data library license sales in the NASA, offset partially by an increase in contract marine work.  Sales of completed multi-client data typically fluctuate during the year and we do not believe this to be indicative of a trend.  NASA’s contract marine increase came from the Gulf of Mexico, where the Veritas Vantage and two source boats acquired a large, wide-azimuth survey.  The APAC revenue increase came from both marine contract acquisition and processing. In marine contract acquisition, the Veritas Viking II, the Pacific Sword and Veritas Searcher operated in Australia, India, Myanmar and New Zealand during the period. In processing, increased pricing and higher throughput due to increased processing speed led to higher revenue.  EAME also generated increased marine contract revenue, with its most notable acquisition project being an acquisition job in Ghana.

 

Revenues from our operating segments were as follows:

 

 

 

Three Months Ended April 30,

 

 

 

 

 

Restated

 

Change

 

 

 

2005

 

2004

 

$

 

%

 

 

 

(Dollars in thousands)

 

NASA

 

$

115,478

 

$

143,535

 

$

(28,057

)

(20

)%

EAME

 

30,636

 

17,169

 

13,467

 

78

%

APAC

 

29,396

 

20,010

 

9,386

 

47

%

Total Revenue

 

$

175,510

 

$

180,714

 

$

(5,204

)

(3

)%

 

Revenues by contract type were as follows:

 

 

 

Three Months Ended April 30,

 

 

 

 

 

Restated

 

Change

 

 

 

2005

 

2004

 

$

 

%

 

 

 

(Dollars in thousands)

 

Multi-Client:

 

 

 

 

 

 

 

 

 

Land

 

$

10,291

 

$

24,327

 

$

(14,036

)

(58

)%

Marine

 

37,359

 

58,118

 

(20,759

)

(36

)%

Total Multi-Client

 

47,650

 

82,445

 

(34,795

)

(42

)%

Contract:

 

 

 

 

 

 

 

 

 

Land

 

56,981

 

60,532

 

(3,551

)

(6

)%

Marine

 

70,879

 

37,737

 

33,142

 

88

%

Total Contract

 

127,860

 

98,269

 

29,591

 

30

%

Total Revenue

 

$

175,510

 

$

180,714

 

$

(5,204

)

(3

)%

 

Operating income (loss).  Operating income increased from $21.4 in the third quarter of fiscal 2004 to $29.2 million in the third quarter of fiscal 2005.  Cost of services as a percent of revenue fell from 82% to 76% in the comparative periods as a result of increased productivity, favorable mix of jobs and higher pricing.  Therefore, despite the decrease in revenue, our margin (revenue less cost of services) increased $9.8 million. Increased research and development costs of $0.6 million and increased general and administrative expense of $1.4 million reduced the operating income increase to $7.8 million.  We continued to dedicate most of our research and development spending to advanced processing techniques.  General and administrative costs increased in the third quarter of fiscal 2005 due primarily to costs related to the restatement of our financial statements and increased efforts in the area of financial controls.

 

Interest expense. Interest expense decreased from $8.9 million in the third quarter of fiscal 2004 to $1.1 million in the third quarter of fiscal 2005. This decrease is due primarily to the issuance of our Convertible Senior Notes and the repayment of our term notes with the proceeds in the third quarter of fiscal 2004. This refinancing resulted in a significantly lower interest rate.  Our Convertible Senior Notes accrue interest at a rate of LIBOR less 0.75%, which equated to 2.26% for the three months ended June 15, 2005 and is much lower than the various tranches of debt in place in fiscal 2004.  In addition, approximately $6.4 million of debt issuance costs were expensed in the third

 

14



 

quarter of fiscal 2004 in connection with the retirement of the term notes.

 

Income taxes.  Income taxes in the third quarter of fiscal 2005 were 40% of income before provision for income taxes due primarily to our inability to record deferred tax assets arising in certain jurisdictions because of losses in prior years.  This treatment is consistent with fiscal 2004; however, income earned by jurisdiction was different in fiscal 2004 resulting in a lower overall tax rate.

 

Nine months ended April 30, 2005 compared with nine months ended April 30, 2004 (restated)

 

Revenues.  Our revenues increased by 16% from $428.2 million for the first nine months of fiscal 2004 to $497.3 million for the first nine months of fiscal 2005.  This increase was driven by increased contract work, primarily marine, in all regions and increased sales of licenses to multi-client data in EAME partially offset by lower sales of licenses to multi-client data primarily in the U.S. and Canada.  NASA’s increase in contract marine work was in the Gulf of Mexico, where the Veritas Vantage and two source boats acquired a wide-azimuth survey.  APAC’s revenue increase was also generated by marine contract work, as we operated the Veritas Viking II, the Pacific Sword and Veritas Searcher in Australia, India, Myanmar and New Zealand during the period.  EAME generated most of its increased revenue through sales of licenses to multi-client data for offshore Africa and the North Sea.

 

Revenues from our operating segments were as follows:

 

 

 

Nine Months Ended April 30,

 

 

 

 

 

Restated

 

Change

 

 

 

2005

 

2004

 

$

 

%

 

 

 

(Dollars in thousands)

 

NASA

 

$

330,335

 

$

322,750

 

$

7,585

 

2

%

EAME

 

95,487

 

62,690

 

32,797

 

52

%

APAC

 

71,497

 

42,737

 

28,760

 

67

%

Total Revenue

 

$

497,319

 

$

428,177

 

$

69,142

 

16

%

 

Revenues by contract type were as follows:

 

 

 

Nine Months Ended April 30,

 

 

 

 

 

Restated

 

Change

 

 

 

2005

 

2004

 

$

 

%

 

 

 

(Dollars in thousands)

 

Multi-Client:

 

 

 

 

 

 

 

 

 

Land

 

$

36,303

 

$

53,333

 

$

(17,030

)

(32

)%

Marine

 

144,110

 

150,491

 

(6,381

)

(4

)%

Total Multi-Client

 

180,413

 

203,824

 

(23,411

)

(11

)%

Contract:

 

 

 

 

 

 

 

 

 

Land

 

133,965

 

126,542

 

7,423

 

6

%

Marine

 

182,941

 

97,811

 

85,130

 

87

%

Total Contract

 

316,906

 

224,353

 

92,553

 

41

%

Total Revenue

 

$

497,319

 

$

428,177

 

$

69,142

 

16

%

 

Operating income (loss).  Operating income increased from $20.5 million for the first nine months of fiscal 2004 to $66.0 million for the first nine months of fiscal 2005.  During the first quarter of fiscal 2004, we changed our multi-client amortization accounting policy to include a minimum amortization from the date of survey completion, instead of only during the last 24 months of the survey’s book life.  As a result of this change, we recorded a charge of $22.1 million in cost of services in the first quarter of fiscal 2004.

 

Excluding the charge for the change in our accounting method, our operating income for the nine months of fiscal 2005 would have been $23.4 million greater than the comparable period last year.  Our margin (revenues less cost of services) would have increased by $29.7 million due to our revenue increase and a decrease in cost of services as a percent of revenue of approximately 4%.  Increased productivity, favorable mix of jobs and higher pricing contributed to the margin increase.

 

15



 

Research and development costs have increased by $2.5 million from the comparable period in the prior year primarily due to our development of multi component (pressure and shear wave) acquisition and processing and general increases in research spending.

 

General and administrative expense increased by $3.8 million due to the expenses associated with the restatement of our historical financial statements and those associated with our increased efforts in the area of financial controls.  Research and development expense and general and administrative expense both grew due to increased incentive compensation related to our improved financial performance.

 

Interest expense. Interest expense decreased from $17.4 million for the first nine months of fiscal 2004 to $2.8 million for the first nine months of fiscal 2005.  This decrease is due primarily to the issuance of our Convertible Senior Notes and the repayment of our term notes with the proceeds from the issuance of our Convertible Senior Notes in the third quarter of fiscal 2004.  The refinancing resulted in a significantly lower interest rate. Our Convertible Senior Notes accrue interest at a rate of LIBOR less 0.75%, which currently equated to 2.26% for the three months ended June 15, 2005 and is much lower than the various tranches of debt in place in the comparable period in fiscal 2004.  In addition, approximately $6.4 million of debt issuance costs were expensed in the third quarter of fiscal 2004 in connection with the retirement of the term notes.

 

Income taxes.  Income taxes for the first nine months of fiscal 2005 were 45% of income before provision for income taxes due primarily to our inability to record deferred tax assets arising in certain jurisdictions because of losses in prior years.  This treatment is consistent with fiscal 2004.

 

Liquidity and capital resources

 

Cash flow and liquidity

 

Our internal sources of liquidity are cash on hand and cash flow from operations.  External sources include public financing, equity sales, equipment financing, our Credit Facility and trade credit.  We believe that our current cash balance and cash flow from operations will be adequate to meet our liquidity needs over the next twelve months.

 

Net cash provided by operating activities increased from $152.2 million for the first nine months of fiscal 2004 to $239.8 million for the first nine months of fiscal 2005 primarily due to improved profitability and improvements in working capital.  Net cash used by investing activities increased slightly from $114.7 million for the first nine months of fiscal 2004 to $120.0 million for the first nine months of fiscal 2005.  Our cash investment for fiscal 2005 is projected to be approximately $218 million and includes capital expenditures to replace and upgrade our existing equipment of approximately $79 million and investment in our data library of approximately $139 million.  We expect to continue to fund these investments from our current cash and cash equivalents on hand and from internally generated funds.

 

While we believe that we have adequate sources of funds to meet our liquidity needs, our ability to meet our obligations depends on our future performance, which is subject to many factors beyond our control.  Key factors affecting future results include utilization levels of acquisition and processing assets and demand for multi-client library surveys, all of which are driven by exploration spending and, ultimately, the underlying commodity prices.

 

Debt structure

 

As of April 30, 2005, our long-term debt outstanding consisted of $155.0 million of Convertible Senior Notes due 2024.  In addition, we have a Credit Facility consisting primarily of a revolving loan facility permitting borrowings of up to $55.0 million and various unsecured lines of credit totaling $8.5 million which may be used exclusively for letters of credit and bank guarantees.

 

The Convertible Senior Notes bear interest at a per annum rate which equals the three-month LIBOR rate, adjusted quarterly, minus a spread of 0.75%.  The interest rate on the Convertible Senior Notes from March 15, 2005 through June 14, 2005 equated to 2.26% and equates to 2.66% for the subsequent three month period.  The Convertible Senior Notes are our senior unsecured obligations and are convertible under certain circumstances into a

 

16



 

combination of cash and our common stock.  In general, upon conversion of a note, the holder of such note will receive cash equal to the principal amount of the note and shares of our common stock for the note’s conversion value in excess of such principal amount.  We entered into a registration rights agreement in which we agreed to file a registration statement with the Securities and Exchange Commission within 90 days of March 3, 2004 to register resales of the notes and associated shares of common stock.  We filed a registration statement on May 28, 2004 in compliance with the registration rights agreement; however, the registration statement is not yet effective.  Because our registration statement was not effective on August 31, 2004 as required by the indenture, we have been incurring liquidated damages in the amount of $2,153 per day since August 31, 2004.  We will continue to incur these damages until registration is effective.

 

Under certain circumstances and at the option of the holder, the Convertible Senior Notes are convertible prior to the maturity date into cash and shares of our common stock.  Certain of these circumstances may result in classification of the Convertible Senior Notes as current on our balance sheet.  These circumstances include:

 

1.                                       the closing sale price of our common stock is over 120% of the conversion price, which is currently $24.03 (with 120% being $28.84) for 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the fiscal quarter preceding the quarter in which the conversion occurs;

 

2.                                       if we called the notes for redemption and the redemption has not occurred;

 

3.                                       the occurrence of a five consecutive trading day period in which the trading price of the notes was less than 95% of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of the notes; or

 

4.                                       the occurrence of specified corporate transactions.

 

Should any of these circumstances occur, the Convertible Senior Notes would be convertible at the then current stock price times the conversion ratio of 41.6146. This amount would be payable in cash equal to the principal amount of the notes, the par value adjusted for dividends or other equity transactions, and the additional amount payable in shares of our common stock.  Currently, the maximum amount payable by us on conversion is $155 million in cash plus approximately 6.5 million shares. For clarity, conversion at a $40 stock price would result in our payment of $155 million in cash and 2.575 million shares of common stock.  This settlement method is prescribed in the indenture and is not optional at the discretion of any party.  The shares issuable from such conversion are considered in the calculation of diluted earnings per share.

 

As of April 30,2005, there were no borrowings and $3.1 million in letters of credit outstanding under the revolving loan facility.  Borrowings under the Credit Facility, including swing-line loans, bear interest at a variable rate determined on the date of borrowing that is related to various base rates and margins depending upon our leverage ratio and the location of the borrowing.  The Credit Facility expires in February 2006.  Borrowings under the Credit Agreement are secured by substantially all of our assets, including the accounts receivable from certain of our foreign subsidiaries.

 

We obtained waivers from our lenders under the Credit Facility allowing us to deliver our required reports for the second and third quarters of fiscal 2005 to the lenders by no later than July 29, 2005.

 

We have various unsecured lines of credit, with lending institutions that operate in geographic areas not covered by the lending institutions in our Credit Facility, totaling $8.5 million that may be used exclusively for the issuance of letters of credit and bank guarantees.  As of April 30, 2005, $3.5 million in letters of credit were outstanding under these lines.

 

Critical accounting policies

 

While all of our accounting policies are important in assuring that we adhere to current accounting standards, certain policies are particularly important due to their impact on our financial statements.  These are described in detail in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Significant Accounting Policies included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2004

 

17



 

which description is incorporated herein by reference.

 

Item 3.             Quantitative and Qualitative Disclosures Regarding Market Risk

 

From time to time we enter into contracts with customers whereby payment is not in our functional currency.  To protect us against exposure to exchange rate risk, we entered into currency exchange contracts with financial institutions.  During the quarter ended April 30, 2005, we did not enter into any such contracts and, as of April 30, 2005, had no such contracts outstanding.

 

Item 4.             Controls and Procedures

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined as a process designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

We carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, as to the effectiveness, design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of April 30, 2005.  The evaluation considered our various procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in the time periods specified in the rules and forms of the Securities and Exchange Commission.  Our Chief Executive Officer and Chief Financial Officer concluded, as a result of our failure to file this quarterly report by its due date of June 9, 2005 and our untested remediation of previously disclosed material weaknesses, that our disclosure controls and procedures were not effective as of April 30, 2005.

 

We have previously disclosed several weaknesses and deficiencies related to reconciliations and revenue recognition.  As of June 17, 2005, we believe that we have substantially remediated those weaknesses and deficiencies as they affect our financial reporting for the period ended April 30, 2005.  However, we have not completed our evaluation and testing of the remediated controls and, at this time, cannot conclude that we do not still have material weaknesses in these areas.

 

Changes in Internal Controls Over Financial Reporting

 

During the third quarter of fiscal 2005, in connection with our efforts to remediate the deficiencies and weaknesses previously disclosed relating to account reconciliation and revenue recognition, we made the following changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

 

                  required, on a quarterly basis, completion of a general inquiry form by accountants in each of our operating areas related to accounts and accounting controls within their particular operation;

                  established a formal evaluation and implementation process regarding changes in accounting rules;

                  formalized the accounting guidelines and review process for recognition of revenue on certain customer contracts; and

                  made various minor adjustments to our internal control processes as a result of our detailed documentation and evaluation process in preparation for compliance with Section 404 of the Sarbanes Oxley Act of 2002.

 

As our control changes have not been fully tested and we cannot conclude that we have eliminated our control weaknesses, in preparing our financial statements for the quarter ended April 30, 2005, we performed additional procedures to ensure that those financial statements are fairly stated in all material respects in conformity with generally accepted accounting principles.

 

Section 404

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we document and test the internal controls over

 

18



 

financial reporting and to assert in our Annual Report on Form 10-K for the fiscal year ended July 31, 2005, whether the internal controls over financial reporting at July 31, 2005 are effective.  Any material weakness in internal controls over financial reporting existing at that date will preclude us from making a positive assertion.  We are currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act.

 

In response to the requirements of the Sarbanes-Oxley Act and our previously reported material weaknesses in certain areas, we are formalizing our entire control framework and all of our control procedures.  We have done significant work in evaluating, documenting, testing and remediating this framework and processes in a concerted effort to be in compliance with Section 404 by our required deadline for fiscal 2005.  During the course of these activities and in addition to the material weakness in our disclosure controls described above, we have identified certain internal control issues and deficiencies which we believe should be improved and corrected.  We have a remediation plan for these issues and expect to have completed our remediation and testing prior to the end of fiscal 2005 in order to make a positive assertion as to the effectiveness of internal controls over financial reporting, however, there can be no assurance that all the identified issues and deficiencies or any other issues that may arise from continued testing will be resolved in time to do so.

 

19



 

PART II.  OTHER INFORMATION

 

Item 6.       Exhibits

 

Exhibits filed with this report:

 

Exhibit
No.

 

Description

*23.1

Consent of Independent Registered Public Accounting Firm

*31.1

Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 by Chief Executive Officer.

*31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

*32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

*32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

 


*  filed herewith

 

20



 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of June 2005.

 

 

Veritas DGC Inc.

 

 

 

By:

  /s/ Mark E. Baldwin

 

 

  mark E. Baldwin

 

 

  Executive Vice President, Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

 

 

 

 

 

  /s/ Vincent M. Thielen

 

 

  vincent m. thielen

 

 

  Vice President, Corporate Controller
  (Chief Accounting Officer)

 

21